[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Notices]
[Pages 4038-4071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1790]
[[Page 4037]]
_______________________________________________________________________
Part III
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
Proposed Exemptions; MBNA America Bank, National Association (MBNA);
Notice
Federal Register / Vol. 63, No. 17 / Tuesday, January 27, 1998 /
Notices
[[Page 4038]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10304, et al.]
Proposed Exemptions; MBNA America Bank, National Association
(MBNA)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
MBNA America Bank, National Association (MBNA), Located in Newark,
Delaware, (Application No. D-10304)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. Effective as of the date this proposed exemption is granted, the
restrictions of sections 406(a) and 407(a) of the Act and the taxes
imposed by section 4975(a) and (b) of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the following
transactions involving trusts and certificates evidencing interests
therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the trust,
the sponsor or an underwriter and an employee benefit plan subject to
the Act or section 4975 of the Code (a plan) when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of the Excluded Plan that are invested in
certificates.1
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\1\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective as of the date this proposed exemption is granted, the
restrictions of sections 406(b)(1) and 406(b)(2) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the trust,
the sponsor or an underwriter and a plan when the person who has
discretionary authority or renders investment advice with respect to
the investment of plan assets in the certificates is (a) an obligor
with respect to receivables contained in the trust constituting 0.5
percent or less of the fair market value of the obligations or
receivables contained in the aggregate undivided interest in the trust
allocated to the certificates of the relevant series, or (b) an
affiliate of a person described in (a); if
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
as defined in Section III.L., and at least 50 percent of the aggregate
undivided interest in the trust allocated to the certificates of a
series is acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates of a series
does not exceed 25 percent of all of the certificates of that class
outstanding at the time of the acquisition;
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with
[[Page 4039]]
respect to which the person has discretionary authority or renders
investment advice is invested in certificates representing the
aggregate undivided interest in a trust allocated to the certificates
of a series and containing receivables sold or serviced by the same
entity; 2 and
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\2\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(v) Immediately after the acquisition of the certificates, not more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice is
invested in certificates representing an interest in the trust, or
trusts containing receivables sold or serviced by the same entity. For
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not
be considered to service receivables contained in a trust if it is
merely a subservicer of that trust;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in Section I. B.(1)(i), (iii)
through (v) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective as of the date that the proposed exemption is granted,
the restrictions of sections 406(a), 406(b) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c) of the Code, shall not apply to transactions in
connection with the servicing, management and operation of a trust,
including reassigning receivables to the sponsor, removing from the
trust receivables in accounts previously designated to the trust,
changing the underlying terms of accounts designated to the trust,
adding new receivables to the trust, designating new accounts to the
trust, the retention of a retained interest by the sponsor in the
receivables, the exercise of the right to cause the commencement of
amortization of the principal amount of the certificates, or the use of
any eligible swap transactions, provided that:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing agreement;
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust; 3
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\3\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions. For purposes
of this proposed exemption, all references to ``prospectus'' include
any related supplement thereto, and any documents incorporated by
reference therein, pursuant to which certificates are offered to
investors.
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(3) The addition of new receivables or designation of new accounts,
or the removal of receivables in previously-designated accounts, meets
the terms and conditions for such additions, designations or removals
as are described in the prospectus or private placement memorandum of
such certificates, which terms and conditions have been approved by
Standard & Poor's Ratings Services, Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co., or Fitch Investors Service, L.P., or
their successors (collectively, the Rating Agencies), and does not
result in the certificates receiving a lower credit rating from the
Rating Agencies than the then current rating of the certificates; and
(4) The series of which the certificates are a part will be subject
to an ``Economic Pay Out Event'' (as defined in Section III.X.), which
is set forth in the pooling and servicing agreement and described in
the prospectus or private placement memorandum associated with the
series, the occurrence of which will cause any revolving period,
scheduled amortization period or scheduled accumulation period
applicable to the certificates to end, and principal collections to be
applied to monthly payments of principal to, or the accumulation of
principal for the benefit of, the certificateholders of such series
until the earlier of payment in full of the outstanding principal
amount of the certificates of such series or the series termination
date specified in the prospectus or private placement memorandum.
Notwithstanding the foregoing, Section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed under section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(E) or (F) of the Code, for the receipt of a fee
by the servicer of the trust, in connection with the servicing of the
receivables and the operation of the trust, from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in Section III.U. below.
D. Effective as of the date that the proposed exemption is granted,
the restrictions of sections 406(a) and 407(a) of the Act and the taxes
imposed by sections 4975(a) and (b) of the Code, by reason of sections
4975(c)(1)(A) through (D) of the Code, shall not apply to any
transaction to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider as described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
Section II--General Conditions
A. The relief provided under Section I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as such terms would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is either: (i) in one of the two
highest generic rating categories from any one of the Rating Agencies;
or (ii) for certificates with a duration of one year or less, the
highest short-term generic rating category from any one of the Rating
Agencies; provided that, notwithstanding such ratings, this exemption
(if granted) shall apply to a particular class of certificates only if
such class (an Exempt Class) is part of a series in which credit
support is provided to the Exempt Class through a senior-subordinated
series structure or other form of third-party credit support which, at
a minimum, represents five (5) percent of the outstanding principal
balance of certificates issued for the Exempt Class, so that an
investor in the Exempt Class will not bear the initial risk of loss;
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be considered to be an
affiliate of a servicer solely because the trustee has succeeded to the
rights and responsibilities of the servicer pursuant to the terms of a
[[Page 4040]]
pooling and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the consideration received by
the sponsor as a consequence of the assignment of receivables (or
interests therein) to the trust, to the extent allocable to the series
of certificates purchased by a plan, represents not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the servicer, to the extent allocable
to the series of certificates purchased by a plan, represents not more
than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission (SEC) under the Securities Act of
1933;
(7) The trustee of the trust is a substantial financial institution
or trust company experienced in trust activities and is familiar with
its duties, responsibilities, and liabilities as a fiduciary under the
Act (i.e. ERISA). The trustee, as the legal owner of, or holder of a
perfected security interest in, the receivables in the trust, enforces
all the rights created in favor of certificateholders of such trust,
including plans;
(8) Prior to the issuance by the trust of any new series,
confirmation is received from the Rating Agencies that such issuance
will not result in the reduction or withdrawal of the then current
rating of the certificates held by any plan pursuant to this exemption;
(9) To protect against fraud, chargebacks or other dilution of the
receivables in the trust, the pooling and servicing agreement and the
Rating Agencies require the sponsor to maintain a seller interest of
not less than 2 percent of the principal balance of the receivables
contained in the trust;
(10) Each receivable added to a trust is an eligible receivable,
based on criteria of the relevant Rating Agency(ies) and as specified
in the pooling and servicing agreement. The pooling and servicing
agreement requires that any change in the terms of the cardholder
agreements must be made applicable to the comparable segment of
accounts owned or serviced by the sponsor which are part of the same
program or have the same or substantially similar characteristics;
(11) The pooling and servicing agreement limits the number of the
sponsor's newly originated accounts to be designated to the trust,
unless the Rating Agencies otherwise consent in writing, to the
following: (i) With respect to any three-month period, 15 percent of
the number of existing accounts designated to the trust as of the first
day of such period, and (ii) with respect to any twelve-month period,
20 percent of the number of existing accounts designated to the trust
as of the first day of such twelve-month period;
(12) The pooling and servicing agreement requires the sponsor to
deliver an opinion of counsel semi-annually confirming the validity and
perfection of each transfer of newly originated accounts to the trust
if such opinion is not delivered with respect to each interim addition;
(13) The pooling and servicing agreement requires the sponsor and
the trustee to receive confirmation from a Rating Agency that no
Ratings Effect (i) will result from a proposed transfer of newly
originated accounts to the trust, or (ii) will have resulted from the
transfer of all newly originated accounts added to the trust during the
preceding three-month period (beginning at quarterly intervals
specified in the pooling and servicing agreement and ending in the
calendar month prior to the date such confirmation is issued), provided
that a Rating Agency confirmation shall not be required under clause
(ii) for any three-month period in which any additions of newly
originated accounts occurred only after receipt of prior Rating Agency
confirmation pursuant to clause (i);
(14) If a particular series of certificates held by any plan
involves a Ratings Dependent or Non-Ratings Dependent Swap entered into
by the trust, then each particular swap transaction relating to such
certificates:
(a) Shall be an Eligible Swap;
(b) Shall be with an Eligible Swap Counterparty;
(c) In the case of a Ratings Dependent Swap, shall include as an
early payout event, as specified in the pooling and servicing
agreement, the withdrawal or reduction by any Rating Agency of the swap
counterparty's credit rating below a level specified by the Rating
Agency where the servicer (as agent for the trustee) has failed, for a
specified period after such rating withdrawal or reduction, to meet its
obligation under the pooling and servicing agreement to:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty which is acceptable to the Rating Agency and the terms of
which are substantially the same as the current swap agreement (at
which time the earlier swap agreement shall terminate); or
(ii) Cause the swap counterparty to establish any collateralization
or other arrangement satisfactory to the Rating Agency such that the
then current rating by the Rating Agency of the particular series of
certificates will not be withdrawn or reduced;
(d) In the case of a Non-Ratings Dependent Swap, shall provide
that, if the credit rating of the swap counterparty is withdrawn or
reduced below the lowest level specified in Section III.II. hereof, the
servicer, as agent for the trustee, shall within a specified period
after such rating withdrawal or reduction:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement shall
terminate); or
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms;
and
(e) Shall not require the trust to make any termination payments to
the swap counterparty (other than a currently scheduled payment under
the swap agreement) except from ``Excess Finance Charge Collections''
(as defined below in Section III.LL.) or other amounts that would
otherwise be payable to the servicer or the seller; and
(15) Any series of certificates, to which one or more swap
agreements entered into by the trust applies, may be acquired or held
in reliance upon this proposed exemption only by Qualified Plan
Investors.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Section I, if the provision in Section II.A.(6) above is
not satisfied for the acquisition or holding by a plan of such
certificates, provided that:
(1) Such condition is disclosed in the prospectus or private
placement memorandum; and
[[Page 4041]]
(2) In the case of a private placement of certificates, the trustee
obtains a representation from each initial purchaser which is a plan
that it is in compliance with such condition, and obtains a covenant
from each initial purchaser to the effect that, so long as such initial
purchaser (or any transferee of such initial purchaser's certificates)
is required to obtain from its transferee a representation regarding
compliance with the Securities Act of 1933, any such transferees shall
be required to make a written representation regarding compliance with
the condition set forth in Section II.A.(6).
Section III--Definitions
For purposes of this proposed exemption:
A. Certificate means a certificate:
(1) That (i) represents a beneficial ownership interest in the
assets of a trust and entitles the holder to payments denominated as
principal, interest and/or other payments made as described in the
applicable prospectus or private placement memorandum and in accordance
with the pooling and servicing agreement in connection with the assets
of such trust, to the extent allocable to the series of certificates
purchased by a plan, either currently or after a revolving period
during which principal payments on assets of the trust are reinvested
in new assets, or (ii) is denominated as a debt instrument that
represents a regular interest in a financial asset securitization
investment trust (FASIT), within the meaning of section 860L(a) of the
Code, and is issued by and is an obligation of the trust.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust; and
(2) With respect to which (a) MBNA or any of its affiliates is the
sponsor, and (b) MBNA, any of its affiliates, or an ``underwriter'' (as
defined in Section III.C.) is the sole underwriter or the manager or
co-manager of the underwriting syndicate or a selling or placement
agent.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1) Either
(a) Receivables (as defined in Section III.V.); or
(b) Participations in a pool of receivables (as defined in Section
III.V.) where such beneficial ownership interests are not subordinated
to any other interest in the same pool of receivables; \4\
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\4\ The Department notes that no relief would be available under
the exemption if the participation interests held by the trust were
subordinated to the rights and interests evidenced by other
participation interests in the same pool of receivables.
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(2) Property which has secured any of the assets described in
Section III.B.(1); \5\
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\5\ MBNA states that it is possible for credit card receivables
to be secured by bank account balances or security interests in
merchandise purchased with credit cards. Thus, the proposed
exemption should permit foreclosed property to be an eligible trust
asset.
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(3) Undistributed cash or permitted investments made therewith
maturing no later than the next date on which distributions are to be
made to certificate holders, except during a Revolving Period (as
defined herein) when permitted investments are made until such cash can
be reinvested in additional receivables described in paragraph (a) of
this Section III.B.(1);
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any cash collateral accounts, insurance
policies, third-party guarantees, contracts of suretyship and other
credit support arrangements for any certificates, swap transactions, or
under any yield supplement agreements,\6\ yield maintenance agreements
or similar arrangements; and
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\6\ In a series involving an accumulation period (as defined in
Section III.Z.), a yield supplement agreement may be used by the
Trust to make up the difference between (i) the reinvestment yield
on permitted investments, and (ii) the interest rate on the
certificates of that series.
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(5) Rights to receive interchange fees received by the sponsor as
partial compensation for the sponsor's taking credit risk, absorbing
fraud losses and funding receivables for a limited period prior to
initial billing with respect to accounts designated to the trust.
Notwithstanding the foregoing, the term trust does not include any
investment pool unless: (i) the investment pool consists only of
receivables of the type which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment
pools have been rated in one of the two highest generic rating
categories by at least one of the Rating Agencies for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption; and (iii) certificates evidencing an interest in such other
investment pools have been purchased by investors other than plans for
at least one year prior to the plan's acquisition of certificates
pursuant to this exemption.
C. Underwriter means an entity which has received from the
Department an individual prohibited transaction exemption which
provides relief for the operation of asset pool investment trusts that
issue asset-backed pass-through securities to plans that is similar in
format and substance to this proposed exemption (each, an Underwriter
Exemption); \7\ any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such entity; and any member of an underwriting syndicate or selling
group of which such firm or affiliated person described above is a
manager or co-manager with respect to the certificates.
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\7\ For a listing of Underwriter Exemptions, see the description
provided in the text of the operative language of Prohibited
Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21, 1997).
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D. Sponsor means MBNA, or an affiliate of MBNA that organizes a
trust by transferring credit card receivables or interests therein to
the trust in exchange for certificates.
E. Master Servicer means MBNA or an affiliate that is a party to
the pooling and servicing agreement relating to trust receivables and
is fully responsible for servicing, directly or through subservicers,
the receivables in the trust pursuant to the pooling and servicing
agreement.
F. Subservicer means MBNA or an affiliate of MBNA, or an entity
unaffiliated with MBNA which, under the supervision of and on behalf of
the master servicer, services receivables contained in the trust, but
is not a party to the pooling and servicing agreement.
G. Servicer means MBNA or an affiliate which services receivables
contained in the trust, including the master servicer and any
subservicer or their successors pursuant to the pooling and servicing
agreement.
H. Trustee means an entity which is independent of MBNA and its
affiliates and is the trustee of the trust. In the case of certificates
which are denominated as debt instruments, ``trustee'' also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, provider of other
credit support for, or other contractual counterparty of, a trust.
Notwithstanding the foregoing, a swap counterparty is not an insurer,
and a person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. Obligor means any person, other than the insurer, that is
obligated to make payments with respect to any receivable included in
the trust.
K. Excluded Plan means any plan with respect to which any member of
[[Page 4042]]
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Each swap counterparty;
(7) Any obligor with respect to receivables contained in the trust
constituting more than 0.5 percent of the fair market value of the
aggregate undivided interest in the trust allocated to the certificates
of a series, determined on the date of the initial issuance of such
series of certificates by the trust; or
(8) Any affiliate of a person described in Section III.L.(1)-(7).
M. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. Sale includes the entrance into a forward delivery commitment
(as defined in Section III.Q. below), provided that:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. Forward Delivery Commitment means a contract for the purchase or
sale of one or more certificates to be delivered at an agreed future
settlement date. The term includes both mandatory contracts (which
contemplate obligatory delivery and acceptance of the certificates) and
optional contracts (which give one party the right but not the
obligation to deliver certificates to, or demand delivery of
certificates from, the other party).
R. Reasonable Compensation has the same meaning as that term is
defined in 29 CFR section 2550.408c-2.
S. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust and any supplement thereto pertaining to a particular series of
certificates. In the case of certificates which are denominated as debt
instruments, ``pooling and servicing agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
T. Series means an issuance of a class or various classes of
certificates by the trust all on the same date pursuant to the same
pooling and servicing agreement, and any supplement thereto and
restrictions therein.
U. Qualified Administrative Fee means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing with respect to
the receivables;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement or described in all
material respects in the prospectus or private placement memorandum
provided to the plan before it purchases certificates issued by the
trust; and
(4) The amount paid to investors in the trust is not reduced by the
amount of any such fee waived by the servicer.
V. Receivables means secured or unsecured obligations of credit
card holders which have arisen or arise in Accounts designated to a
trust. Such obligations represent amounts charged by cardholders for
merchandise and services and amounts advanced as cash advances, as well
as periodic finance charges, annual membership fees, cash advance fees,
late charges on amounts charged for merchandise and services and
certain other fees (such as bad check fees, cash advance fees, and
other fees specified in the cardholder agreements) designated by card
issuers (other than a qualified administrative fee as defined in
Section III.U.).
W. Accounts are revolving credit card accounts serviced by MBNA or
an affiliate, which were originated or purchased by MBNA or an
affiliate, and are designated to a trust such that receivables arising
in such accounts become assets of the trust.
X. Revolving Period means a period of time, as specified in the
pooling and servicing agreement, during which principal collections
allocated to a series are reinvested in newly generated receivables
arising in the accounts.
Y. Amortization Period means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will commence to be paid to the
certificateholders of such series in installments.
Z. Accumulation Period means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will be deposited in an account to be
distributed to certificateholders in a lump sum on the expected
maturity date.
AA. Pay Out Event means any of the events specified in the pooling
and servicing agreement or supplement thereto that results (in some
instances without further affirmative action by any party) in the early
commencement of either an amortization period or an accumulation
period, including (1) the failure of the sponsor or the servicer,
whichever is subject to the relevant obligation under the pooling and
servicing agreement, (i) to make any payment or deposit required under
the pooling and servicing agreement within five (5) business days after
such payment or deposit was required to be made, or (ii) to observe or
perform any of its other covenants or agreements set forth in the
pooling and servicing agreement, which failure has a material adverse
effect on holders of investor certificates of the relevant series and
continues unremedied for 60 days; (2) a breach of any representation or
warranty made by the sponsor or the servicer in the pooling and
servicing agreement that continues to be incorrect in any material
respect for 60 days; (3) the occurrence of certain bankruptcy events
relating to the sponsor or the servicer; (4) the failure by the sponsor
to convey to the trust additional receivables to maintain the minimum
seller interest that is required by the pooling and servicing agreement
and the Rating Agencies; (5) if a class of investor certificates is in
an Accumulation Period, the amount on deposit in the accumulation
account in any month is
[[Page 4043]]
less than the amount required to be on deposit therein; (6) the failure
to pay in full amounts owing to investors on the expected maturity
date; and (7) the Economic Pay Out Event.
BB. An Economic Pay Out Event occurs automatically when the
portfolio yield for any series of certificates, averaged over three
consecutive months (or such other period approved by one of the Rating
Agencies) is less than the base rate of the series averaged over the
same period. Portfolio yield for a series of certificates for any
period is equal to the sum of the finance charge collections and other
amounts treated as finance charge collections less total defaults for
the series divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies. The base rate for a series of certificates for any
period is the sum of (i) amounts payable to certificateholders of the
series with respect to interest, (ii) servicing fees allocable to the
series payable to the servicer, and (iii) any credit enhancement fee
allocable to the series payable to a third party credit enhancer,
divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies.
CC. CCA or Cash Collateral Account means that certain account
established in the name of the trustee that serves as credit
enhancement with respect to the investor certificates and holds cash
and/or permitted investments (as defined below in Section III.KK.)
which conform to applicable provisions of the pooling and servicing
agreement.
DD. Group means a group of any number of series offered by the
trust that share finance charge and/or principal collections in the
manner described in the applicable prospectus or private placement
memorandum.
EE. Ratings Effect means the reduction or withdrawal by a Rating
Agency of its then current rating of the certificates held by any plan
pursuant to this proposed exemption.
FF. Principal Receivables Discount means, with respect to any
account designated by the sponsor, the portion of the related principal
receivables that represents a discount from the face value thereof and
that is treated under the pooling and servicing agreement as finance
charge receivables.
GG. Ratings Dependent Swap means an interest rate swap, or (if
purchased by or on behalf of the trust) an interest rate cap contract,
that is part of the structure of a series of certificates where the
rating assigned by the Rating Agency to any series of certificates held
by any plan is dependent on the terms and conditions of the swap and
the rating of the swap counterparty, and if such certificate rating is
not dependent on the existence of the swap and rating of the swap
counterparty, such swap or cap shall be referred to as a ``Non-Ratings
Dependent Swap''. With respect to a Non-Ratings Dependent Swap, each
Rating Agency rating the certificates must confirm, as of the date of
issuance of the certificates by the trust, that entering into an
Eligible Swap with such counterparty will not affect the rating of the
certificates.
HH. Eligible Swap means a Ratings Dependent or Non-Ratings
Dependent Swap:
(1) Which is denominated in U.S. Dollars;
(2) Pursuant to which the trust pays or receives, on or immediately
prior to the respective payment or distribution date for the series of
certificates, a fixed rate of interest, or a floating rate of interest
based on a publicly available index (e.g. LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the trust receiving such
payments on at least a quarterly basis and obligated to make separate
payments no more frequently than the swap counterparty, with all
simultaneous payments being netted;
(3) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(4) Which is not leveraged (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in subparagraph (2) above, and the difference
between the products thereof, calculated on a one to one ratio and not
on a multiplier of such difference);
(5) Which has a final termination date that is the earlier of the
date on which the trust terminates or the related class of certificates
is fully repaid; and
(6) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in subparagraphs (1)
through (4) above without the consent of the trustee.
II. Eligible Swap Counterparty means a bank or other financial
institution which has a rating, at the date of issuance of the
certificates by the trust, which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the certificates; provided that, if a swap counterparty
is relying on its short-term rating to establish eligibility hereunder,
such counterparty must either have a long-term rating in one of the
three highest long-term rating categories or not have a long-term
rating from the applicable Rating Agency, and provided further that if
the series of certificates with which the swap is associated has a
final maturity date of more than one year from the date of issuance of
the certificates, and such swap is a Ratings Dependent Swap, the swap
counterparty is required by the terms of the swap agreement to
establish any collateralization or other arrangement satisfactory to
the Rating Agencies in the event of a ratings downgrade of the swap
counterparty.
JJ. Qualified Plan Investor means a plan investor or group of plan
investors on whose behalf the decision to purchase certificates is made
by an appropriate independent fiduciary that is qualified to analyze
and understand the terms and conditions of any swap transaction used by
the trust and the effect such swap would have upon the credit ratings
of the certificates. For purposes of the proposed exemption, such a
fiduciary is either:
(1) a ``qualified professional asset manager'' (QPAM),8
as defined under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13,
1984);
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\8\ PTE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a QPAM, provided certain conditions are met. QPAMs (e.g.
banks, insurance companies, registered investment advisers with
total client assets under management in excess of $50 million) are
considered to be experienced investment managers for plan investors
that are aware of their fiduciary duties under ERISA.
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(2) an ``in-house asset manager'' (INHAM),9 as defined
under Part IV(a) of PTE 96-23 (61 FR 15975, 15982, April 10, 1996); or
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\9\ PTE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an INHAM, an entity which
is generally a subsidiary of an employer sponsoring the plan which
is a registered investment adviser with management and control of
total assets attributable to plans maintained by the employer and
its affiliates which are in excess of $50 million.
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(3) A plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such certificates.
KK. Permitted Investments means investments that either (i) are
direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligation is backed by
the full faith and credit of the
[[Page 4044]]
United States, or (ii) have been rated (or the obligor thereof has been
rated) in one of the three highest generic rating categories by a
Rating Agency; are described in the pooling and servicing agreement;
and are permitted by the relevant Rating Agency(ies).
LL. Excess Finance Charge Collections means, as of any day funds
are distributed from the trust, the amount by which the finance charge
collections allocated to certificates of a series exceed the amount
necessary to pay certificate interest, servicing fees and expenses, to
satisfy cardholder defaults or charge-offs, and to reinstate credit
support.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
Summary of Facts and Representations
1. The applicant is MBNA America Bank, National Association (i.e.
MBNA), a national banking association located in Wilmington, Delaware.
MBNA conducts nationwide consumer lending programs principally
comprised of credit card related activities. MBNA is a wholly-owned
subsidiary of MBNA Corporation, a bank holding company organized under
the laws of Maryland in 1990.
2. The transactions for which an exemption is requested are
investments by employee benefit plans in certain certificates
(Certificates) representing the right to receive principal and interest
payments from the assets of various Trusts which hold credit card
receivables. Each Trust will issue, from time to time, a particular
series of Certificates (i.e. a Series) which will be secured by the
Trust's assets. A Series may include one or more classes of
Certificates, some of which may be subordinate to others. However, only
senior certificates issued by such Trusts, which meet the restrictive
criteria designed to ensure investor safety discussed herein would be
eligible for the exemptive relief to be provided under this proposed
exemption.
The Trusts
3. Each Trust is created under a Pooling and Servicing Agreement
(PSA) between MBNA, as Seller and Servicer, and an independent and
unaffiliated Trustee. Upon creation of a Trust, the Seller transfers to
the Trust a pool of interest-bearing credit card receivables which are
selected under strict criteria approved by one or more of certain
nationally recognized rating agencies,10 from the portfolio
of revolving credit card accounts owned by MBNA. The PSA establishes
the general parameters for the Trust, such as the requirements for
eligible receivables to be transferred to the Trust, the manner of
transferring and administering and servicing the receivables, Seller
representations and covenants as to receivable eligibility, Servicer
and Trustee duties and eligibility, and other matters.
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\10\ As noted in Section I.C.(3) above, these rating agencies
are: (i) Standard & Poors Ratings Services, a division of McGraw-
Hill Companies Inc.; (ii) Moody's Investors Service, Inc.; (iii)
Duff & Phelps Credit Rating Co.; and (iv) Fitch Investors Service,
L.P., or their successors (collectively, the Rating Agencies).
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The applicant represents that any Trust that issues a class of
Certificates to be covered by the proposed exemption would include the
following investor safeguards:
(a) Restricted selection of receivables;
(b) Periodic reporting and monitoring of accounts;
(c) Minimum receivable requirements;
(d) Restrictions regarding addition and removal of accounts;
(e) Servicer eligibility requirements;
(f) Servicer daily reports, duties and public accounting firm
review;
(g) Trustee eligibility and duties;
(h) Restrictions on investments;
(i) Protection from the consequences of unplanned events; and
(j) Limited discretion.
These investor safeguards are discussed in the following
paragraphs.
4. Restricted Selection of Receivables. In order for a receivable
to be eligible for transfer to the Trust, either on the initial closing
date or on any subsequent date, it must have arisen under an eligible
account. An eligible account is one that is in existence and owned by
and maintained with MBNA (as of the initial selection date or, with
respect to additional accounts, as of the relevant addition date), and
is payable in U.S. dollars. In addition, an eligible account must have
a United States address for its obligor, must not have been classified
as counterfeit, canceled, fraudulent, stolen or lost, and must not have
been charged off by MBNA under its customary and usual charge-off
procedures. The eligible receivable must have been created in
compliance with applicable law. All consents, licenses and other
approvals necessary for the creation of the receivable and the
execution of the credit card agreement must have been obtained and be
in full force and effect, and MBNA must have good title to the
receivable, free and clear of liens. Finally, an eligible receivable
must constitute the legal valid and binding payment obligation of the
obligor, and constitute an ``account'' under Article 9 of the Uniform
Commercial Code (the ``UCC''), as in effect in the State of Delaware,
so as to grant the Trust a first priority security interest in the
event of bankruptcy. Once the pool of eligible accounts has been
identified, accounts are selected at random for the transfer of their
receivables to the Trust so as to provide a combination of receivables
that is representative of the entire pool of eligible receivables.
MBNA represents and warrants that the receivables transferred to
the Trust, and the accounts related to those receivables, meet the
above-described standards for eligible receivables and accounts, and
that no selection procedures adverse to the Certificateholders have
been employed in selecting accounts. These restrictions on account
selection are in place to prevent the concentration of high risk
accounts. Each relevant Rating Agency requires that all of these
safeguards be in place before a superior rating is given.
5. Periodic Reporting and Monitoring of Accounts. In connection
with the transfer of the receivables to the Trust, MBNA must record and
file a UCC financing statement (including any continuation statements,
when applicable) in order to perfect the assignment of the receivables,
and must deliver a file-stamped copy of such financing or continuation
statement to the Trustee. MBNA must also indicate in its computer
system file of credit card accounts the receivables transferred to the
Trust by identifying the accounts with a unique designation, as
described in the PSA. MBNA must deliver a complete list of all accounts
in the Trust to the Trustee on or prior to the initial closing date and
thereafter on a periodic basis as required by the PSA.
The Trustee is able to continually monitor the Trust's assets by
reviewing the monthly reports regarding pool performance which are
prepared for the Trustee and investors by MBNA, as Servicer. In
addition, MBNA provides the Trustee with a complete list of accounts on
a periodic basis, as required by the PSA. Each relevant Rating Agency
requires significant monitoring procedures for the servicing of
receivables to ensure investor safety before a superior rating is
granted.
6. Minimum Receivable Requirements. The aggregate principal amount
of the receivables held by the Trust must be at least equal to the sum
of the principal amount of the
[[Page 4045]]
Certificates (prior to the commencement of any related amortization or
accumulation) for all Series then outstanding (other than a Series
which is backed in full by accumulated cash or permitted investments
(see Paragraph 11 below)). If, on the last business day of any month,
the aggregate amount of principal receivables is less than the required
minimum, MBNA must designate additional accounts (or may convey
participations in other credit card receivable pools sponsored by MBNA)
to be transferred to the Trust so that the aggregate principal
receivables will meet the minimum requirement.
Interests in the assets of each Trust are allocated among the
Certificate holders of each Series and the Seller (i.e., MBNA). The
interest in the Trust assets allocated to the Seller is referred to as
the ``Seller Interest.'' To protect against fraud, chargebacks or other
dilution of receivables in the Trust, the PSA and the Rating Agencies
will require MBNA, as the Trust's sponsor, to maintain a seller
interest of not less than 2 percent of the principal balance of the
receivables contained in the Trust (referred to as the ``Minimum Seller
Interest''). If, during any period of 30 consecutive days, the Seller
Interest averages less than the Minimum Seller Interest, MBNA must
designate additional accounts (or participations in other MBNA credit
card receivable pools) to be transferred by MBNA to the Trust in order
to satisfy the minimum requirement. When account payments exceed
account purchases, the total pool of receivables in the relevant Trust
contracts. As a result, the Seller Interest declines, thus providing a
buffer to prevent a decline in the principal balance of the
Certificates prior to the scheduled payment of principal. Thus, when
the receivable balances in the accounts that secure the Certificates
decline, the Seller Interest decreases, not the principal balance of
the Certificates. When the account balances again increase, the Seller
Interest is increased. The Seller Interest will also decline as a
result of dilution of the receivable portfolio resulting from noncash
reductions such as merchandise returns or servicer errors.
The minimum receivable requirement and Minimum Seller Interest
requirement imposed on MBNA by the PSA (as described above) cause the
Trustee, Servicer or Seller to have limited discretion regarding the
minimum size of the Trust. Each relevant Rating Agency gains comfort
from these minimum receivable levels that the Trust will be maintained
so as not to adversely affect the ability of the Trust assets to
support the promised interest and/or principal payments to Certificate
holders.
7. Restrictions Regarding Addition and Removal of Accounts. In
addition to the limitations discussed above regarding the selection of
accounts and minimum receivable requirements, the following
restrictions apply to the addition of accounts subsequent to the
initial transfer to the Trust. Any transfer of receivables from
additional accounts must be preceded by written notice to the Trustee,
each relevant Rating Agency and the Servicer specifying the approximate
aggregate amount of receivables to be transferred. In connection with
the transfer, MBNA will warrant that the additional accounts are
eligible accounts and that each receivable is an eligible receivable,
and that no selection procedures believed by MBNA to be materially
adverse to the interest of the Certificateholders were utilized in
selecting the accounts. MBNA must deliver an opinion of counsel with
respect to the added receivables to the Trustee, with a copy to each
relevant Rating Agency, that such addition is enforceable and that the
Trust has either a valid transfer of, or a grant of security interest
in, the additional accounts. The PSA requires that the Servicer and the
Trustee receive confirmation from a Rating Agency that no Ratings
Effect (i.e., a downgrade or withdrawal of the then current rating of
any outstanding Series of Certificates) either (i) will result from a
proposed transfer of receivables from additional accounts to the Trust,
or (ii) will have resulted from the transfer of all receivables from
additional accounts added to the Trust during the preceding three-month
period (beginning at quarterly intervals specified in the PSA and
ending in the calendar month prior to the date such confirmation is
issued). However, a Rating Agency confirmation will not be required for
any three-month period in which any additions of newly originated
accounts occurred only after receipt of a prior Rating Agency
confirmation.
MBNA may remove receivables, subject to the minimum receivable
requirements discussed above, not more than once in a monthly period.
MBNA must give the Trustee and the Servicer written notice stating the
approximate aggregate principal balance of the removal, and certifying
that such removal must not result in a Pay Out Event. MBNA must warrant
that no selection procedures believed by it to be materially adverse to
the Certificateholders were utilized in selecting the removed
receivables. Each relevant Rating Agency must have confirmed that such
proposed removal will not result in a Ratings Effect. MBNA states
further that the amount of any receivables that are removed must be
less than 5 percent of the aggregate amount of principal receivables
or, if any Series is paid in full, the amount of receivables removed
must approximate the initial investor interest of such Series.
Each Rating Agency has determined that the number of additional
accounts from which receivables may be added is generally limited to:
(i) with respect to any three-month period, 15 percent of the number of
existing accounts designated to the Trust as of the first day of such
period, and (ii) with respect to any twelve-month period, 20 percent of
the number of accounts designated to the Trust as of the first day of
such 12-month period. However, if this maximum amount is greater than a
similar test (specified in the PSA) based on the calendar year, then
the calendar year test serves as the maximum addition. MBNA may be able
to exceed the maximum addition amount if approval is received from each
relevant Rating Agency.
By informing the relevant Rating Agencies of all details regarding
additions and removals, the Trust is effectively reexamined each time
these events occur in order to assure that the changes to the Trust
assets will not adversely affect the rating of any outstanding Series.
Each relevant Rating Agency scrutinizes the receivables from the
additional accounts, or the relative strength of the pool of
receivables designated to the Trust both before and after the removal,
as the case may be, in making any such re-examinations.
8. Servicer Eligibility Requirements. The Servicer of the
receivables must be either the Seller (MBNA), an affiliate of MBNA, or
an entity unaffiliated with MBNA acting as a ``Subservicer'' which is
qualified to service a portfolio of consumer revolving credit card
accounts and meets certain requirements. Under such requirements, the
entity acting as either a Servicer or Subservicer must be legally
qualified and have the capacity to service the accounts, must be
qualified to use the software used to service the accounts, must have
demonstrated the ability to professionally and competently service a
portfolio of similar accounts in accordance with customary standards of
skill and care, and must have a certain net worth (e.g. at least
$50,000,000). These requirements are in line with the Rating Agencies'
standards for servicers.
Regardless of whether the Servicer is MBNA, an affiliate, or a
third party meeting the eligibility requirements discussed above, the
Servicer's duties
[[Page 4046]]
are largely ministerial and are provided in detail in the PSA. The
Servicer administers the receivables, collects payments due thereunder,
makes withdrawals from the various accounts created under the PSA which
are forwarded to the Trustee on the dates and in the manner provided
under the PSA, commences enforcement proceedings with respect to
delinquent receivables and makes filings and other necessary reports
with the SEC and any state securities authorities as necessary to
comply with the law. The Servicer must maintain fidelity bond coverage
insuring against losses through its own wrongdoing, and is entitled to
receive a reasonable servicing fee which is specifically enumerated in
each PSA supplement.
9. Servicer Daily Reports, Duties and Public Accounting Firm
Review. On each business day the Servicer must prepare and make
available to the Trustee a record of the collections processed on the
preceding day and the aggregate amount of receivables as of the close
of business on the preceding day. The Servicer must prepare monthly for
the Trustee, the paying agent, any credit enhancement provider, and
each relevant Rating Agency, a certificate setting forth the aggregate
collections processed during the preceding month with respect to each
Series outstanding, the aggregate amounts of the investor percentages
of collections of finance charge receivables and principal receivables
processed during the preceding month with respect to each Series
outstanding, the balances in the finance charge account, the principal
account or any Series account during the preceding month, and other
detailed information.
The Servicer will provide annually a certificate from an officer
indicating that the Servicer's activities over a 12-month period were
reviewed and the officer believed such obligations were fully performed
under the PSA. Every year, a nationally recognized firm of independent
certified public accountants will review the internal accounting
controls and their relation to the servicing of the receivables as well
as the mathematical accuracy of the Servicer's monthly reports, and the
results will be provided to the Trustee, any credit enhancement
provider, and each relevant Rating Agency. These additional reviews of
the Servicer are designed to prevent Servicer fraud and limit Servicer
discretion. These safeguards protect investors and are a positive
factor in a Rating Agency's evaluation.
10. Trustee Eligibility and Duties. The Trustee must be a financial
institution organized, doing business and regulated under the laws of
the United States, any State and/or the District of Columbia and have a
long-term unsecured debt rating as specified in the PSA. The Trustee
must be independent of MBNA and its affiliates and meet the same
requirements that would be necessary for an eligible Servicer (as
discussed under ``Servicer Eligibility Requirements'' above). Any
successor Trustee must also meet these requirements and be approved by
each relevant Rating Agency.
The Trustee is responsible for receiving collections from
receivables as provided in the PSA, investing any moneys as directed in
the PSA, and directing payments to Certificateholders according to the
plan of allocation and payment detailed in the PSA. In performing these
functions, the Trustee has little, if any, discretion. The Trustee is
also responsible for examining any resolutions, statements,
certificates, opinions, reports or other instruments in order to
determine whether they substantially conform to the requirements of the
PSA. The Trustee has no power to vary the corpus of the Trust and must
perform the duties of other parties should they fail to perform under
the PSA. Like the Servicer restrictions, the restrictions on the
Trustee limit discretion, enhance investor protection, and are a
positive influence on a Rating Agency's evaluation.
11. Restrictions on Investments. The collections of principal
receivables and finance charge receivables held in the Trust may be
invested by the Trustee only in ``permitted investments'' during the
interim periods between collection and payout to the
Certificateholders. Such permitted investments are detailed in the PSA
and represent what each relevant Rating Agency considers to be secure
investments that sufficiently protect investors. Under the proposed
exemption, permitted investments would be investments that either (i)
are direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligation is backed by
the full faith and credit of the United States, or (ii) have been rated
(or the obligor thereof has been rated) in one of the three highest
generic rating categories by a Rating Agency. In addition, all
permitted investments must be described in the PSA and permitted by the
relevant Rating Agencies.
12. Protection From the Consequences of Unplanned Events. If MBNA
should desire to merge or consolidate with, or assume the obligations
of, another entity, certain provisions of the PSA ensure that the Trust
assets remain secure. The new entity involved in the merger or
consolidation must be a national banking association, a state banking
corporation or another entity not subject to bankruptcy laws and must
be organized and regulated under the laws of the United States, any
State and/or the District of Columbia. The new entity must expressly
assume the performance of every covenant and obligation of MBNA, and
MBNA must provide the Trustee with an opinion of counsel that such
assumption is legal, valid and binding. Finally, each relevant Rating
Agency must be notified in advance of the change. Similarly, a merger,
consolidation or assumption of the obligations of the Servicer also
requires the same protections of a full assumption of liabilities, an
opinion of counsel and Rating Agency notification.
The Certificateholders of each Series receive protection from
certain unplanned events (called ``Pay Out Events''). If a ``Pay Out
Event'' occurs with respect to a Series, either (i) a rapid
amortization period will commence during which the Certificates of such
Series will be paid down periodically, as provided in the PSA
Supplement, with the principal collections allocable to such Series or
with principal collections allocable to other Series which are shared
within the same Group (as discussed in Paragraph 15 below), or (ii) a
rapid accumulation period will commence during which the Series'
principal collections will be accumulated until a designated payment
date. Pay Out Events include ``Trust Pay Out Events,'' which apply to
all Series, and ``Series Pay Out Events,'' which apply to particular
Series. ``Trust Pay Out Events'' include: (i) certain events of
insolvency, conservatorship or receivership relating to MBNA; (ii) the
Trust becomes an ``investment company'' within the meaning of the
Investment Company Act of 1940, as amended; and (iii) MBNA becomes
unable for any reason to transfer receivables to the Trust as required
by the PSA.
Series Pay Out Events generally include:
(a) Failure of MBNA to make required payments or observe its other
covenants to the extent there is a material adverse effect on the
Certificateholders of that Series;
(b) Breach by MBNA of its representations and warranties to the
extent there is a material adverse effect on the Certificateholders of
that Series;
[[Page 4047]]
(c) A default by the Servicer that would have a material adverse
effect on the Certificateholders of that Series; and
(d) The portfolio yield for any three consecutive monthly periods
is less than the average base rate for such period (an ``Economic Pay
Out Event'').
With respect to item (d) above, MBNA states that an ``Economic Pay
Out Event'' will occur automatically when the portfolio yield for any
series of certificates, averaged over three consecutive months (or such
other period approved by one of the Rating Agencies) is less than the
base rate of the series averaged over the same period. Portfolio yield
for a series of certificates for any period is equal to the sum of the
finance charge collections and other amounts treated as finance charge
collections less total defaults for the series divided by the
outstanding principal balance of the investor certificates of the
series, or such other measure approved by one of the Rating Agencies.
The base rate for a series of certificates for any period is the sum of
(i) amounts payable to certificateholders of the series with respect to
interest, (ii) servicing fees allocable to the series payable to the
servicer, and (iii) any credit enhancement fee allocable to the series
payable to a third party credit enhancer, divided by the outstanding
principal balance of the investor certificates of the series, or such
other measure approved by one of the Rating Agencies.
MBNA states that an ``Economic Pay Out Event'' should not occur
because the amount of receivables included within the Trust has been
designed to create ``excess spread'' between the yield on the
receivables and the certificate rates. Excess spread is the amount by
which the yield on the receivables held by the Trust exceeds, at any
point in time, the amounts necessary to pay certificate interest,
principal (if such payments are due to certificateholders), servicing
fees and expenses, and to satisfy cardholder defaults or charge-offs.
The Rating Agencies examine the expected amount of ``excess spread''
very closely before providing a high credit rating for the
certificates.
A ``Pay Out Event'' accelerates the scheduled payments or
accumulation of principal on the Certificates as specified within each
PSA Supplement, and eliminates shared allocations from such Series,
thus increasing the probability of full payment to senior
Certificateholders, including plan investors. During a rapid
amortization period, which is triggered by a ``Pay Out Event'', all
collections are distributed periodically (instead of being distributed
on the originally scheduled principal payment dates), as provided in
the PSA Supplement, until the senior Certificateholders are paid in
full. During a rapid accumulation period, also triggered by a ``Pay Out
Event'', all principal collections allocated to the senior Certificates
are accumulated and invested by the Trustee until the senior
Certificateholders' interest is backed in full by cash and/or permitted
investments which will be distributed on the originally scheduled
payment date. Payments or accumulations are then directed to the next
level of Certificates below the senior Certificates, until all
Certificates have been paid or accumulated, or the Trust terminates.
Because this accelerated pay out or accumulation schedule is triggered
as a result of poor performance, senior Certificateholders are
protected from a loss which might result from long-term yield
reduction, and are, to a level of certainty necessary to support a
rating of ``AA'' (or better), likely to receive their entire investment
return. The timing or amount of the payments or accumulations is
specifically defined in each PSA Supplement, further protecting
investors from mismanagement. This automatic pay out trigger is
important to each relevant Rating Agency as well, because it strictly
limits the potential losses to investors.
Investors are also protected from the negative consequences of an
event of Seller insolvency. If one or more of a number of indications
of insolvency are present, a ``Pay Out Event'' occurs and a rapid
amortization or a rapid accumulation period is triggered. As discussed
above, this event accelerates payments or accumulation of collections
to maximize the probability that senior Certificateholders will be paid
promptly and in full. In addition, the Trustee also liquidates the
receivables (unless otherwise instructed by Certificateholders
representing undivided interests aggregating more than 50 percent of
each outstanding Series) in order to further accelerate the pay out or
accumulation process. The proceeds of the liquidation are distributed
or accumulated in the tiered manner discussed above in the low-yield
scenario.
13. Limited Discretion. Inherent in all of the restrictions
surrounding creation and management of the Trust, discussed above, is
the limited ability of any party to the transaction to make
discretionary decisions that would have a major impact on the Trust
assets. The PSA addresses every possible important decision and
provides the exact course of action required. Each detail is designed
to ensure maximum investor security, and minimum Trustee and Servicer
discretion.
The Series
14. Once a Trust is established, a Series of Certificates may be
issued pursuant to a PSA Supplement. One Trust typically supports
multiple Series of Certificates over time. Each Series issued under a
Trust is secured, along with other outstanding Series, by the assets of
the issuing Trust. The PSA Supplement builds on the PSA by specifying
the parameters for the Series, such as the number and type of
Certificates, subordination and payment structuring, and other credit
enhancement features.
The life of a Series consists of a revolving period and an
amortization or accumulation period. During both periods, daily
collections are allocated to the Trust accounts in the manner specified
in the PSA Supplement. Interest payments are made periodically to the
Certificateholders as provided in the PSA Supplement, and principal is
paid in a lump sum on the date designated in the PSA Supplement (in the
case of an accumulation period), or periodically pursuant to a schedule
in the PSA Supplement (in the case of an amortization period), for each
class of Certificates. The allocation of collections and the priority
of payments differs slightly during the revolving period and the
amortization or accumulation period.
15. During a Series' revolving period, periodic interest payments
are made to Certificateholders. Principal payments, however, are not
made until the amortization period or at the end of the accumulation
period. Principal collections during the revolving period typically are
shared among the Series that are members of the same Group. If one
Series has principal receipts greater than needed to pay principal for
that period, the excess may be used to pay principal for another Series
in the Group which may have a need for such principal collections. In
such instances, the minimum principal receivable balances required by
the Rating Agencies for all Series must be maintained. The process of
sharing within the Group spreads payment risk over a broader base of
collections and effectively allows concentration of principal
collections supporting a particular Series, resulting in increased
reliability of the payment streams.
Principal collections received during the amortization or
accumulation period are also potentially shared, but are first applied
to the principal funding for the Series to which they relate. The
[[Page 4048]]
amortization or accumulation period ends on the earliest of: (i) when
the investors interests are paid in full; (ii) the Series termination
date provided in the PSA Supplement; or (iii) the commencement of a
rapid amortization or rapid accumulation period. Finance charges and
fees collected during the revolving period and the accumulation or
amortization period are applied to the related Series, and are not
generally shared within the Group.
16. Every Trust will have a variety of credit enhancement features,
as described in the PSA and specified in the applicable PSA Supplement.
In addition to the Group sharing of collections discussed above, other
credit enhancements may include subordination and letters of credit or
other third party arrangements. The type and value of credit
enhancement for a particular Series is designed to compliment the
underlying Trust receivables so that, as a whole, the Trust assets
satisfy the relevant Rating Agency's requirements for the superior
rating desired. In this regard, MBNA represents that the particular
class of certificates for each series to which this proposed exemption
would apply (an Exempt Class) will have credit support provided to the
Exempt Class through either a senior-subordinated series structure or
other form of third party credit support which, at a minimum, will
represent five (5) percent of the outstanding principal balance of
certificates issued for the Exempt Class, so that an investor in the
Exempt Class will not bear the initial risk of loss.
Each Series with an Exempt Class covered by the proposed exemption
will include one or more of the following credit enhancing investor
safeguards (as discussed further below): (i) Subordination; (ii) Third
Party Credit Enhancement; and (iii) Allocation of Collections and
Payments to Certificateholders Allows No Variation.
17. Subordination. Typically, a Series will have some form of
subordination incorporated within the payment schedule detailed in the
PSA Supplement. Such a Series will consist of at least one class of
senior Certificates (typically designated as ``Class A Certificates'')
which will be allocated collections in a more favorable manner than,
and/or prior to, another class (or other classes) of Certificates
(i.e., the next lower level, typically designated as ``Class B
Certificates'') and often will include an uncertificated class
subordinate to the Class B Certificates (typically designated as the
``Collateral Interest'' or ``Class C Interest''). The subordination
process generally will involve both the receipt of collections and the
effect of losses. Thus, such collections will be applied to the senior
(or Class A) Certificates first and then the second tier (or Class B)
Certificates, and will be applied last to the lowest level class of
Certificates (or the Collateral Interest). Conversely, the losses will
first reduce the lowest class of Certificates (or the Collateral
Interest), only affecting the senior (or Class A) Certificates after
all other classes have been reduced to zero. The result of this tiered
structure is that the senior (or Class A) Certificates are protected
from nonpayment by the lower classes. If the certainty of payment
provided by the subordination or other credit support mechanism is
insufficient to allow each relevant Rating Agency to bestow one of its
two highest ratings on the senior Certificates, the senior Certificates
would not be eligible for the relief provided under the proposed
exemption.
18. Third Party Credit Enhancement. A Series may include a form of
credit enhancement provided by an outside party, such as a letter of
credit, a cash collateral account, insurance or a guaranty or other
extension of credit. This arrangement will be documented by a separate
contract outlining the terms of the enhancement. A holder of the
Collateral Interest (described in the preceding paragraph) or other
subordinate interest holder may be a loan provider or an investor in
the Class C Interest, and the PSA Supplement typically requires that a
minimum Collateral Interest (or subordinate interest) be a feature of
each Series. As with all the forms of credit enhancement, the terms and
the amount of the Collateral Interest will be dependent upon an
evaluation of the other Trust assets and the additional support needed
to satisfy each relevant Rating Agency that the Certificates are
sufficiently protected from default.
19. Allocation of Collections and Payments to Certificateholders
Allows No Variation. The PSA Supplement provides instructions to the
Servicer regarding each day's collections and the allocation of those
collections to the various accounts created by the PSA. These
instructions indicate how to make the payments and allocations during
the revolving period, the amortization or accumulation period and the
rapid amortization or rapid accumulation period, if any. The
instructions also cover the treatment of other moneys from loans or
other credit enhancement features, and carefully describe how to
accommodate any excess collections, or how to compensate for any
shortfalls. In following these detailed instructions, the Servicer does
not make any discretionary decisions. The tasks are predetermined and
largely ministerial. These explicit instructions, in concert with the
Servicer reporting and review requirements, are designed to permit each
relevant Rating Agency to conclude that mismanagement risks are
minimal.
The Certificates
20. Each Series may include a class or various classes of
Certificates, some of which may be subordinate to others.
Certificateholders will be entitled to receive periodic payments of
interest based upon a fixed or variable interest rate which is set
forth in the PSA Supplement and applied to the Certificateholder's
unpaid principal balance. Certificateholders will also be entitled to
receive a lump sum principal payment on the scheduled payment date, or
a series of periodic payments beginning on the scheduled payment
commencement date, as specified in the PSA Supplement, to the extent of
the Certificateholder's investor interest.
As noted earlier, only Certificates that are not subordinate to any
other class or classes of Certificates (the ``Senior Certificates'')
would be eligible for exemptive relief under the proposed exemption.
21. MBNA represents that a plan would invest in the Certificates
for the same reasons any investor would invest in a highly secure,
``AA'' (or better) rated investment with attractive yields. The Senior
Certificates represent an investment alternative which offers all the
benefits of a highly rated fixed-income security, such as fixed payment
streams, investment diversity and market rates of return. Permitting
plans to invest in Senior Certificates in reliance on the proposed
exemption would provide plans with additional and safe investment
opportunities.
22. With respect to the credit ratings of the Certificates, MBNA
states that the rating reflects a Rating Agency's opinion as to the
relative amount of protection that investors have against loss of
principal and interest during the life of the security. A high rating
comports with a low risk of loss. In order to achieve this rating, each
relevant Rating Agency requires the credit card securitizations
effected through the Trust to include a variety of safeguards--such as
subordination or other forms of credit enhancement, limitations on the
Seller's discretion, and Rating Agency approval of certain actions
taken with respect to the Trust or a Series of Certificates. Each
relevant Rating Agency typically requires legal opinions regarding the
credit card securitization's structure and performs
[[Page 4049]]
stress tests on the portfolio of selected receivables in order to
evaluate the securitization's anticipated performance within a range of
significant market fluctuations. In addition, each relevant Rating
Agency performs a comprehensive review of all documents related to the
credit card securitization before the formal rating is given. Each
relevant Rating Agency must provide confirmations that additions of
receivables from accounts to a Trust, or withdrawals of existing
accounts from a trust, will not result in a Ratings Effect on the
Certificates.
After its rating is assigned, the Rating Agency monitors the
performance of the credit card receivables included in a Trust in order
to assess whether the performance remains consistent with the rating.
Although variations in portfolio performance are expected during a
Certificate's duration and are factored into a Rating Agency's
analysis, extreme and unexpected performance results may result in a
revision of the rating. MBNA makes its Trust performance information
available to each relevant Rating Agency in a variety of ways, in order
to ensure that the Rating Agency receives all the information it deems
necessary to make its evaluation. For example, MBNA provides
information on portfolio performance broken down by account balance,
credit limit, account age, delinquency period and geographic
distribution.
MBNA states that the receipt of one of the two highest generic
ratings from a Rating Agency represents the result of an exhaustive
analysis of the many risk factors involved with a Series of
Certificates, and provides a comfort level to investors that the
potential reduction in yield as a result of credit losses is
minimal.\11\
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\11\ In this regard, the Department was advised by
representatives from two of the Rating Agencies (RA Reps) of certain
issues concerning the ratings of certificates issued by trusts
holding credit card receivables. The RA Reps discussed, among other
things, the fact that different banks use different underwriting
standards and may offer cardholders different terms on their
accounts. Some banks may be willing to accept cardholders with more
risky credit histories while other banks may not or may offer better
terms to cardholders with superior payment histories. The result may
be that some banks have a higher quality portfolio of receivables
than other banks. The RA Reps stated that if a bank securitizes a
portfolio of receivables which holds a number of riskier accounts,
the Rating Agencies will require more credit enhancement measures
because different assumptions will have to be made about the
performance of the portfolio--e.g. higher charge-off rates will be
assumed and greater ``excess spread'' will be necessary to avoid
losses--in order to achieve an ``AAA'' rating. Thus, for example,
Bank A's certificates may receive an ``AAA'' rating along with
MBNA's certificates even though Bank A may experience more charge-
offs on the credit card accounts and may have different payment
rates on the receivables associated with those accounts.
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23. MBNA represents that the statistics on Certificates backed by
credit card trusts indicate that they are sound investments. In this
regard, MBNA states that public credit card securitization transactions
have been in existence since 1987 and issuers have successfully sold
over $230 billion in Certificates backed by credit card receivables
since then with a zero investor loss rate. MBNA states further that
plans have invested during this time in such Certificates, despite the
prohibited transaction provisions of the Act, in reliance upon the
Department's regulation defining ``plan assets'' and, specifically, the
``100-Holder Exception'' for ``publicly-offered'' securities (see 29
CFR 2510.3-101).\12\
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\12\ The Department's regulation defining ``plan assets''
provides that, if a plan invests in a publicly-offered security, the
plan's assets will not include, solely by reason of such investment,
any of the underlying assets of the entity issuing the security
(i.e. the ``look-through rule'' will not apply and the operations of
the entity will not be subject to scrutiny under the prohibited
transaction provisions of the Act). The regulation defines a
``publicly-offered'' security as one that is freely transferable,
widely-held, and registered under the federal securities laws. A
class of securities is ``widely held'' if it is owned by 100 or more
investors who are independent of the issuer and of one another at
the conclusion of the offering (see 29 CFR 2510.3-101(b)(3)).
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MBNA maintains that the proposed exemption offers a number of
safeguards in the form of concentration restrictions that are designed
to provide additional protections for plan investors which are not
included in the typical 100-holder exception transactions. For example,
for purposes of the relief from the prohibitions of section 406(b) of
the Act \13\ provided under Section I.B. herein (relating to certain
obligors of the Trust who may have discretionary authority for a plan
investing in certificates of the Trust), the proposed exemption limits
such plan's investment in any class of Certificates of any Series to
not more than 25 percent of the principal amount of the Certificates of
that class outstanding at the time of acquisition. In addition,
immediately after the acquisition of the certificates, not more than 25
percent of the assets of such a plan may be invested in certificates
representing an interest in the trust, or trusts containing receivables
sold or serviced by the same entity. Further, the proposed exemption
requires that at least 50 percent of the outstanding principal amount
of each class of Certificates in which plans have invested, and at
least 50 percent of the outstanding aggregate interest of the Trust, in
connection with the initial issuance of the Certificates, must be
acquired by persons independent of the Sponsor, the Servicer and other
related parties. These restrictions are designed to protect plan
investors from the risks inherent in excessive ownership concentration
and related party transactions.
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\13\ Section 406(b) of the Act, in pertinent part, prohibits a
plan fiduciary from dealing with the assets of the plan in his own
interest or for his own account, or from acting on behalf of a party
(or representing a party) whose interests are adverse to the
interests of the plan and its participants and beneficiaries.
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24. MBNA represents that the requested exemption is similar to the
Underwriter Exemptions.\14\ The Underwriter Exemptions are a series of
exemptions granted by the Department to various underwriters or trust
sponsors for transactions relating to the acquisition by plans of
certificates representing interests in trusts holding various types of
assets (e.g. single and multi-family residential or commercial
mortgages, motor vehicle leases and related vehicles, equipment leases
or other secured obligations), as provided in Section III.B. of the
Underwriter Exemptions.
---------------------------------------------------------------------------
\14\ As indicated in Footnote 7 above, PTE 97-34 (which granted
an amendment to the Underwriter Exemptions) contains the most
comprehensive listing of these exemptions.
---------------------------------------------------------------------------
The Trusts described under the proposed exemption for Certificates
backed by credit card receivables differ from trusts holding secured
obligations in that the Trusts do not contain a fixed pool of assets
and the receivables are not secured by real or tangible personal
property. However, MBNA states that this difference in structure does
not represent a difference in the quality or safety of investments by
plans and other investors in the Certificates. Under the proposed
exemption, MBNA represents that the other forms of credit enhancement
provide at least the same level of security for investors in Trusts
holding credit card receivables as exists for investors in trusts
holding tangible or real property as collateral for the payment
obligations to Certificateholders. In addition, Trusts holding credit
card receivables do not involve the expense and administrative
complexities of foreclosure procedures relating to tangible and real
property.
25. Certificateholders are entitled to receive periodic payments of
interest based upon an interest rate, which may be variable or fixed.
This interest rate is specified or defined in the PSA Supplement for
the particular Series and is applied to the outstanding principal
balance of the Certificates. This outstanding balance (net of any
charge-offs) is known as the investor
[[Page 4050]]
interest for the senior class of Certificates. Certificateholders are
also entitled to receive principal payments on the scheduled payment
dates, or sooner or later under certain limited circumstances, pursuant
to the PSA Supplement to the extent of the Certificateholders' investor
interest. The payments are funded from collections on the related
receivables and allocated to the investor interests as provided in the
PSA Supplement.
MBNA states that a Series or class of Certificates may have the
benefit of an interest rate swap agreement entered into between the
Trustee for a Trust and a bank or other financial institution acting as
a swap counterparty. Pursuant to the swap agreement, the swap
counterparty would pay a certain rate of interest to the Trust in
return for a payment of a rate of interest by the Trust, from
collections allocable to the relevant Series or class of Certificates,
to the swap counterparty. MBNA represents that the credit rating
provided to a particular Series or class of Certificates by the
relevant Rating Agency may or may not be dependent upon the existence
of a swap agreement. Thus, in some instances, the terms and conditions
of the swap agreements will not effect the credit rating of the Series
or class of Certificates to which the swap relates (i.e. a ``Non-
Ratings Dependent Swap'').
MBNA states that whether or not the credit rating of a particular
Series or class of Certificates is dependent upon the terms and
conditions of one or more interest rate swap agreements entered into by
the Trust (i.e. a ``Ratings Dependent Swap'' or a ``Non-Ratings
Dependent Swap''), each particular swap transaction will be an
``Eligible Swap'' as defined in Section III.HH. above.
In this regard, an Eligible Swap will be a swap transaction:
(a) Which is denominated in U.S. Dollars;
(b) Pursuant to which the Trust pays or receives, on or immediately
prior to the respective payment or distribution date for the applicable
senior class of Certificates, a fixed rate of interest, or a floating
rate of interest based on a publicly available index (e.g. LIBOR or the
U.S. Federal Reserve's Cost of Funds Index (COFI)), with the Trust
receiving such payments on at least a quarterly basis and obligated to
make separate payments no more frequently than the counterparty, with
all simultaneous payments being netted;
(c) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(d) Which is not leveraged (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in item (b) above, and the difference between
the products thereof, calculated on a one to one ratio and not on a
multiplier of such difference);
(e) Which has a final termination date that is the earlier of the
date on which the Trust terminates or the related class of Certificates
is fully repaid; and
(f) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in items (a) through
(e) above without the consent of the Trustee.
In addition, any Eligible Swap entered into by the Trust will be
with an ``Eligible Swap Counterparty'', which will be a bank or other
financial institution with a rating at the date of issuance of the
Certificates by the Trust which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the Certificates (see Section III.II above). However,
if a swap counterparty is relying on its short-term rating to establish
its eligibility, such counterparty must either have a long-term rating
in one of the three highest long-term rating categories or not have a
long-term rating from the applicable Rating Agency.
With respect to a Ratings Dependent Swap, an Eligible Swap
Counterparty will be subject to certain collateralization or other
arrangements satisfactory to the Rating Agencies in the event of a
rating downgrade of such swap counterparty below a level specified by
the Rating Agency, which would be no lower than the level that would
make such counterparty ``eligible'' under this proposed exemption (see
Section III.II. above). If these arrangements are not established
within a specified period, as described in the PSA, there will be an
early payout event causing certificateholders to receive an earlier
than expected payout of principal on their certificates for the series
to which the swap relates. However, with respect to a Non-Ratings
Dependent Swap, the PSA will not specify that there be an early payout
event for the series to which the swap relates if the credit rating of
the swap counterparty falls below the level required for it to be
considered an Eligible Swap Counterparty (as described in Section
III.II. above). In such instances, in order to protect the interests of
the Trust as a swap counterparty, the servicer (as agent for the
trustee of the trust) will be required to either:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement will
terminate);
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms.
Under any termination of a swap, the Trust will not be required to
make any termination payments to the swap counterparty (other than a
currently scheduled payment under the swap agreement) except from
``excess finance charge collections'' or other amounts that would
otherwise be payable to the servicer or the seller (i.e. MBNA). In this
regard, ``excess finance charge collections'' will be, as of any day
funds are distributed from the Trust, the amounts by which the finance
charge collections allocated to certificates of a series exceed the
amounts necessary to pay certificate interest, servicing fees and
expenses, to satisfy cardholder defaults or charge-offs, and to
reinstate credit support.
With respect to Non-Ratings Dependent Swaps, each Rating Agency
rating the Certificates must confirm, as of the date of issuance of the
Certificates by the Trust, that entering into the swap transactions
with the Eligible Swap Counterparty will not effect the rating of the
Certificates, even if such counterparty is no longer an ``eligible''
counterparty and the swap is terminated.\15\
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\15\ RA Reps have indicated to the Department that certain
series of certificates issued by a trust holding credit card
receivables will have certificate ratings that are not dependent on
the existence of a swap transaction entered into by the trust.
Therefore, a downgrade in the swap counterparty's credit rating
would not cause a downgrade in the rating established by the Rating
Agency for the certificates. RA Reps state that in such instances
there will be more credit enhancements (e.g. ``excess spread'',
letters of credit, cash collateral accounts) for the series to
protect the certificateholders than there would be in a comparable
series where the trust enters into a so-called Ratings Dependent
Swap. Non-Ratings Dependent Swaps are generally used as a
convenience to enable the trust to pay certain fixed interest rates
on a series of certificates. However, the receipt of such fixed
rates by the trust from the counterparty is not a necessity for the
trust to be able to make its fixed rate payments to the
certificateholders.
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Any class of senior Certificates to which one or more swap
agreements entered into by the trust applies, will be acquired or held
only by Qualified Plan
[[Page 4051]]
Investors (as defined in Section III.JJ. above). Qualified Plan
Investors will be plan investors represented by an appropriate
independent fiduciary that is qualified to analyze and understand the
terms and conditions of any swap transaction relating to the class of
senior Certificates to be purchased and the effect such swap would have
upon the credit rating of the senior Certificates to which the swap
relates.
For purposes of the proposed exemption, such a qualified
independent fiduciary will be either:
(i) A ``qualified professional asset manager'' (i.e. QPAM), as
defined under Part V(a) of PTE 84-14; \16\
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\16\ See Footnote 8 above.
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(ii) an ``in-house asset manager'' (i.e. INHAM), as defined under
Part IV(a) of PTE 96-23; \17\ or
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\17\ See Footnote 9 above.
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(iii) A plan fiduciary with total assets under management of at
least $100 million at the time of the acquisition of such Certificates.
Disclosures Available to Investing Plans
26. In connection with the original issuance of certificates, the
prospectus or private offering memorandum will be furnished to
investing plans. The prospectus or private offering memorandum will
contain information pertinent to a plan's decision to invest in the
Certificates, such as:
(a) Information concerning the Certificates, including payment
terms, certain tax consequences of owning and selling Certificates, the
legal investment status and rating of the Certificates, and any special
considerations with respect to the Certificates;
(b) Information about the underlying receivables, including the
types of receivables, statistical information relating to the
receivables, their payment terms, and the legal aspects of the
receivables;
(c) Information about the servicing of the receivables, including
the identity of the servicer and servicing compensation;
(d) Information about the Sponsor of the Trust;
(e) A full description of the material terms of the Pooling and
Servicing Agreement; and
(f) Information about the scope and nature of the secondary market,
if any, for such Certificates.
Certificateholders will be provided with information concerning the
amount of principal and interest to be paid on Certificates in
connection with each distribution to Certificateholders.
Certificateholders will also be provided with periodic information
statements setting forth material information concerning the status of
the Trust.
In the case of a Trust that offers and sells Certificates in a
registered public offering, the Trustee, the Servicer or the Sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934 (the '34 Act). Although some Trusts
that offer Certificates in a public offering will file quarterly
reports on Form 10-Q and Annual Reports on Form 10-K, many Trusts (i)
obtain, by application to the SEC, a complete exemption from the
requirement to file quarterly reports on Form 10-Q and a modification
of the disclosure requirements for annual reports on Form 10-K; or (ii)
are not subject to such requirements for one or more Series of
Certificates issued by the Trust. If such an exemption is obtained,
these Trusts normally would continue to have the obligation to file
current reports on Form 8-K to report material developments concerning
the Trust and the Certificates. While the SEC's interpretation of the
periodic reporting requirement is subject to change, periodic reports
concerning a Trust will be filed to the extent required under the '34
Act.
MBNA states that at or about the time distributions are made to
Certificateholders, reports will be delivered to the Trustee as to the
status of the Trust and its assets, including underlying Receivables.
Such reports will typically contain information regarding the Trust's
assets, payments received or collected by the Servicer, the amount of
delinquencies and defaults, the amount of any payments made pursuant to
any credit support or credit enhancement feature, and the amount of
compensation payable to the Servicer. Such reports will also be
delivered or made available to the Rating Agency that currently rates
the Certificates. Such reports will be available to investors and its
availability will be made known to potential investors. In addition,
promptly after each distribution date, Certificateholders will receive
a statement summarizing information regarding the Trust and its assets
and the applicable Series, including underlying receivables.
28. In summary, MBNA represents that the proposed transactions will
meet the statutory criteria of section 408(a) of the Act because, among
other things:
(a) The acquisition of senior Certificates by a plan will be on
terms (including Certificate price) that are at least as favorable to
the plan as such terms would be in an arm's-length transaction with an
unrelated party;
(b) The rights and interests evidenced by the senior Certificates
will not be subordinated to the rights and interests evidenced by other
investor Certificates of the Trust;
(c) Any senior Certificates acquired by a plan will have received a
rating at the time of such acquisition that is in one of the two
highest generic rating categories from any one of the Rating Agencies
or, for certificates with a duration of one year or less, the highest
short-term generic rating category from any one of the Rating Agencies;
(d) The Trustee of the Trust will not be an affiliate of any other
member of the Restricted Group;
(e) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
Certificates will represent not more than reasonable compensation for
underwriting or placing the Certificates; the consideration received by
the Sponsor as a consequence of the assignment of receivables (or
interests therein) to the Trust will represent not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the Servicer, which are allocable to
the Series or class of certificates purchased by a plan, will represent
not more than reasonable compensation for the Servicer's services under
the Pooling and Servicing Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
(f) Any plan investing in such Certificates will be an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933;
(g) The terms of each Series or class of Certificates, and the
conditions under which MBNA may designate additional accounts to, or
remove previously-designated accounts from, the Trust will be described
in the prospectus or private placement memorandum provided to investing
plans;
(h) The Trustee of the Trust will be a substantial financial
institution or trust company experienced in trust activities and would
be familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act;
(i) The PSA will include ``Economic Pay Out Events'' triggered by a
decline in the performance of the receivables in the Trust;
(j) To protect against fraud, chargebacks or other dilution of the
receivables in the Trust, the PSA and the Rating Agencies will require
MBNA, as the Trust's sponsor, to maintain a seller interest of not less
than 2 percent
[[Page 4052]]
of the principal balance of the receivables contained in the Trust;
(k) Each receivable added to a Trust will be an eligible
receivable, based on criteria of the relevant Rating Agency(ies) and as
specified in the PSA;
(l) The PSA will require that any change in the terms of any
cardholder agreements also will be made applicable to the comparable
segment of accounts owned or serviced by MBNA which are part of the
same program or have the same or substantially similar characteristics;
(m) The addition of new receivables or designation of new accounts,
or removal of previously-designated accounts, will meet the terms and
conditions for such additions, designations, or removals as described
in the prospectus or private placement memorandum for such
Certificates, which terms and conditions will have been approved by
each relevant Rating Agency, and will not result in the Certificates
receiving a lower credit rating from the relevant Rating Agency than
the then current rating of the Certificates;
(n) Any swap transaction relating to senior Certificates that are
covered by the proposed exemption must satisfy the several investor-
protective conditions applicable to Eligible Swaps and must be entered
into by the Trust with an Eligible Swap Counterparty; and
(o) Any class of Certificates to which one or more swap agreements
entered into by the Trust applies may be acquired or held by plans in
reliance upon this proposed exemption only if such plans are
represented by ``Qualified Plan Investors.''
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Citibank (South Dakota), N.A., Citibank (Nevada), N.A., and
Affiliates
Located in North Sioux Falls, South Dakota (Application No. D-10313)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. Effective as of the date this proposed exemption is granted, the
restrictions of sections 406(a) and 407(a) of the Act and the taxes
imposed by section 4975 (a) and (b) of the Code, by reason of section
4975(c)(1) (A) through (D) of the Code, shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the trust,
the sponsor or an underwriter and an employee benefit plan subject to
the Act or section 4975 of the Code (a plan) when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of the Excluded Plan that are invested in
certificates.\18\
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\18\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective as of the date this proposed exemption is granted, the
restrictions of sections 406(b)(1) and 406(b)(2) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the trust,
the sponsor or an underwriter and a plan when the person who has
discretionary authority or renders investment advice with respect to
the investment of plan assets in the certificates is (a) an obligor
with respect to receivables contained in the trust constituting 0.5
percent or less of the fair market value of the aggregate undivided
interest in the trust allocated to the certificates of a series, or (b)
an affiliate of a person described in (a); if
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
as defined in Section III.L., and at least 50 percent of the aggregate
undivided interest in the trust allocated to the certificates of a
series is acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates of a series
does not exceed 25 percent of all of the certificates of that class
outstanding at the time of the acquisition;
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice is
invested in certificates representing the aggregate undivided interest
in a trust allocated to the certificates of a series and containing
receivables sold or serviced by the same entity; 19 and
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\19\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(v) Immediately after the acquisition of the certificates, not more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice is
invested in certificates representing an interest in the trust, or
trusts containing receivables sold or serviced by the same entity. For
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not
be considered to service receivables contained in a trust if it is
merely a subservicer of that trust;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in Section I. B.(1)(i), (iii)
through (v) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective as of the date that the proposed exemption is granted,
the restrictions of sections 406(a), 406(b) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c) of the Code, shall not apply to transactions in
connection with the servicing, management and operation of a trust,
including the reassignment to the sponsor of receivables, the removal
from the trust of accounts previously designated to the trust, the
changing of the underlying terms of accounts designated to the trust,
the adding of
[[Page 4053]]
new receivables to the trust, the designation of new accounts to the
trust, the retention of a retained interest by the sponsor in the
receivables, the exercise of the right to cause the commencement of
amortization of the principal amount of the certificates, or the use of
any eligible swap transactions, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing agreement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust; 20
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\20\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions. For purposes
of this proposed exemption, all references to ``prospectus'' include
any related supplement thereto, and any documents incorporated by
reference therein, pursuant to which certificates are offered to
investors.
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(3) The addition of new receivables or designation of new accounts,
or the removal of receivables or previously-designated accounts, meets
the terms and conditions for such additions, designations or removals
as are described in the prospectus or private placement memorandum for
such certificates, which terms and conditions have been approved by
Standard & Poor's Ratings Services, Moody's Investor Service, Inc.,
Duff & Phelps Credit Rating Co., or Fitch Investors Service, L.P., or
their successors (collectively, the Rating Agencies), and does not
result in the certificates receiving a lower credit rating from the
Rating Agencies than the then current rating for the Certificates; and
(4) The series of which the certificates are a part will be subject
to an Economic Early Amortization Event, which is set forth in the
pooling and servicing agreement and described in the prospectus or
private placement memorandum associated with the series, the occurrence
of which will cause any Revolving Period, Controlled Amortization
Period, or Accumulation Period applicable to the certificates to end,
and principal collections to be applied to monthly payments of
principal to, or accumulated for the account of, the certificateholders
of such series until the earlier of: (i) payment in full of the
outstanding principal amount of such certificates of such series, or
(ii) the series termination date specified in the prospectus or private
placement memorandum.
Notwithstanding the foregoing, Section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed under section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(E) or (F) of the Code, for the receipt of a fee
by the servicer of the trust, in connection with the servicing of the
receivables and the operation of the trust, from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in Section III.S. below.
D. Effective as of the date that the proposed exemption is granted,
the restrictions of sections 406(a) and 407(a) of the Act and the taxes
imposed by sections 4975(a) and (b) of the Code, by reason of sections
4975(c)(1)(A) through (D) of the Code, shall not apply to any
transaction to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider as described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
Section II--General Conditions
A. The relief provided under Section I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as such terms would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is either: (i) in one of the two
highest generic rating categories from any one of the Rating Agencies;
or (ii) for certificates with a duration of one year or less, the
highest short-term generic rating category from any one of the Rating
Agencies; provided that, notwithstanding such ratings, this exemption
(if granted) shall apply to a particular class of certificates only if
such class (an Exempt Class) is part of a series in which credit
support is provided to the Exempt Class through a senior-subordinated
series structure or other form of third-party credit support which, at
a minimum, represents five (5) percent of the outstanding principal
balance of certificates issued for the Exempt Class, so that an
investor in the Exempt Class will not bear the initial risk of loss;
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be considered to be an
affiliate of a servicer solely because the trustee has succeeded to the
rights and responsibilities of the servicer pursuant to the terms of a
pooling and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the consideration received by
the sponsor as a consequence of the assignment of receivables (or
interests therein) to the trust represents not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the servicer, that are allocable to
the series of certificates purchased by a plan, represents not more
than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission (SEC) under the Securities Act of
1933;
(7) The trustee of the trust is a substantial financial institution
or trust company experienced in trust activities and is familiar with
its duties, responsibilities, and liabilities as a fiduciary under the
Act (i.e. ERISA). The trustee, as the legal owner of the receivables in
the trust, enforces all the rights created in favor of
certificateholders of such trust, including employee benefit plans
subject to the Act;
(8) Prior to the issuance of any new series in the trust,
confirmation must be received from the Rating Agencies that such
issuance will not result in the reduction or withdrawal of the then
current rating or ratings of the certificates held by any plan pursuant
to this exemption;
(9) To protect against fraud, chargebacks or other dilution of
receivables in the trust, the pooling and
[[Page 4054]]
servicing agreement and the Rating Agencies require the sponsor to
maintain a seller interest of not less than the greater of (i) 2
percent of the initial aggregate principal balance of investor
certificates issued by the trust, or (ii) 7 percent of the outstanding
aggregate principal balance of investor certificates issued by the
trust;
(10) Each receivable added to the trust will be an eligible
receivable, based on criteria of the Rating Agency and as specified in
the pooling and servicing agreement. The pooling and servicing
agreement requires that any change in the terms of any cardholder
agreements also be made applicable to the comparable segment of
Accounts owned or serviced by the sponsor which are part of the same
program or have the same or substantially similar characteristics;
(11) The pooling and servicing agreement limits the number of the
sponsor's newly originated accounts to be added to the trust, unless
the Rating Agency otherwise affirmatively consents, to the following:
(i) with respect to any three month period, 15 percent of the number of
existing accounts designated to the trust as of the first day of such
period, and (ii) with respect to any calendar year, 20 percent of the
number of existing accounts designated to the trust as of the first day
of such calendar year;
(12) The pooling and servicing agreement requires the sponsor to
deliver an opinion of counsel semi-annually confirming the validity and
perfection of each transfer of newly originated accounts to the trust;
(13) The pooling and servicing agreement requires the sponsor and
the trustee to receive at specified quarterly intervals during the
year, confirmation from a Rating Agency that the addition of all newly
originated accounts added to the trust (during the three month period
ending in the calendar month prior to such confirmation) will not have
resulted in a Ratings Effect;
(14) If a particular series of certificates held by any plan
involves a Ratings Dependent or Non-Ratings Dependent Swap entered into
by the trust, then each particular swap transaction relating to such
certificates:
(a) Shall be an Eligible Swap;
(b) Shall be with an Eligible Swap Counterparty;
(c) In the case of a Ratings Dependent Swap, shall include as an
early amortization event, as specified in the pooling and servicing
agreement, the withdrawal or reduction by any Rating Agency of the swap
counterparty's credit rating below a level specified by the Rating
Agency where the servicer (as agent for the trustee) has failed, for a
specified period after such rating withdrawal or reduction, to meet its
obligation under the pooling and servicing agreement to:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty which is acceptable to the Rating Agency and the terms of
which are substantially the same as the current swap agreement (at
which time the earlier swap agreement shall terminate); or
(ii) Cause the swap counterparty to establish any collateralization
or other arrangement satisfactory to the Rating Agency such that the
then current rating by the Rating Agency of the particular series of
certificates will not be withdrawn or reduced;
(d) In the case of a Non-Ratings Dependent Swap, shall provide
that, if the credit rating of the swap counterparty is withdrawn or
reduced below the lowest level specified in Section III.II. hereof, the
servicer (as agent for the trustee) shall within a specified period
after such rating withdrawal or reduction:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement shall
terminate); or
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms;
and
(e) Shall not require the trust to make any termination payments to
the swap counterparty (other than a currently scheduled payment under
the swap agreement) except from ``Excess Finance Charge Collections''
(as defined below in Section III.LL.) or other amounts that would
otherwise be payable to the servicer or the seller; and
(15) Any Series of certificates which entails one or more swap
agreements entered into by the trust shall be sold only to Qualified
Plan Investors.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Section I, if the provision in Section II.A.(6) above is
not satisfied for the acquisition or holding by a plan of such
certificates, provided that:
(1) Such condition is disclosed in the prospectus or private
placement memorandum; and
(2) In the case of a private placement of certificates, the trustee
obtains a representation from each initial purchaser which is a plan
that it is in compliance with such condition, and obtains a covenant
from each initial purchaser to the effect that, so long as such initial
purchaser (or any transferee of such initial purchaser's certificates)
is required to obtain from its transferee a representation regarding
compliance with the Securities Act of 1933, any such transferees shall
be required to make a written representation regarding compliance with
the condition set forth in Section II.A.(6).
Section III--Definitions
For purposes of this proposed exemption:
A. Certificate means
(1) A certificate:
(a) That represents a beneficial ownership interest in the assets
of a trust;
(b) That entitles the holder to payments denominated as principal
and interest, and/or other payments made in connection with the assets
of such trust, either currently, or after a Revolving Period during
which principal payments on assets in the trust are reinvested in new
assets; or
(2) A certificate denominated as a debt instrument that represents
an interest in a financial asset securitization investment trust
(FASIT) within the meaning of section 860L of the Code, and that is
issued by and is an obligation of a trust;
which is sold upon initial issuance by an underwriter (as defined in
Section III.C.) in an underwriting or private placement.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1) Either
(a) Receivables (as defined in Section III.T.); or
(b) Participations in a pool of receivables (as defined in Section
III.T.) where such beneficial ownership interests are not subordinated
to any other interest in the same pool of receivables; 21
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\21\ The Department notes that no relief would be available
under the exemption if the participation interests held by the trust
were subordinated to the rights and interests evidenced by other
participation interests in the same pool of receivables.
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[[Page 4055]]
(2) Property which has secured any of the assets described in
Section III.B.(1); 22
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\22\ Citibank states that it is possible for credit card
receivables to be secured by bank account balances or security
interests in merchandise purchased with credit cards. Thus, the
proposed exemption should permit foreclosed property to be an
eligible trust asset.
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(3) Undistributed cash or permitted investments made therewith
maturing no later than the next date on which distributions are to be
made to certificate holders, except during a Revolving Period (as
defined herein) when permitted investments are made until such cash can
be reinvested in additional receivables described in paragraph (a) of
this Section III.B.(1);
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any cash collateral accounts, insurance
policies, third-party guarantees, contracts of suretyship and other
credit support arrangements for any certificates, swap transactions, or
under any yield supplement agreements,23 yield maintenance
agreements or similar arrangements; and
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\23\ In a series involving an accumulation period (as defined in
Section III.AA), a yield supplement agreement may be used by the
Trust to make up the difference between (i) the reinvestment yield
on permitted investments, and (ii) the interest rate on the
certificates of that series.
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(5) Rights to receive interchange fees received by the sponsor as
partial compensation for the sponsor's taking credit risk, absorbing
fraud losses and funding receivables for a limited period prior to
initial billing with respect to accounts designated to the trust.
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
receivables of the type which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment
pools have been rated in one of the two highest generic rating
categories by at least one of the Rating Agencies for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption; and (iii) certificates evidencing an interest in such other
investment pools have been purchased by investors other than plans for
at least one year prior to the plan's acquisition of certificates
pursuant to this exemption.
C. Underwriter means an entity which has received an individual
prohibited transaction exemption from the Department that provides
relief for the operation of asset pool investment trusts that issue
``asset-backed'' pass-through securities to plans, that is similar in
format and structure to this proposed exemption (the Underwriter
Exemptions); 24 any person directly or indirectly, through
one or more intermediaries, controlling, controlled by or under common
control with such entity; and any member of an underwriting syndicate
or selling group of which such firm or affiliated person described
above is a manager or co-manager with respect to the certificates.
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\24\ For a listing of the Underwriter Exemptions, see the
description provided in the text of the operative language of
Prohibited Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21,
1997).
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D. Sponsor means Citibank or an affiliate of Citibank that
organizes a trust by transferring credit card receivables or interests
therein to the trust in exchange for certificates.
E. Master Servicer means Citibank or an entity affiliated with
Citibank that is a party to the pooling and servicing agreement
relating to trust receivables and is fully responsible for servicing,
directly or through subservicers, the receivables in the trust pursuant
to the pooling and servicing agreement.
F. Subservicer means Citibank or an affiliate, or an entity
unaffiliated with Citibank, which, under the supervision of and on
behalf of the master servicer, services receivables contained in the
trust, but is not a party to the pooling and servicing agreement.
G. Servicer means Citibank or an affiliate which services
receivables contained in the trust, including the master servicer and
any subservicer or their successors pursuant to the pooling and
servicing agreement.
H. Trustee means an entity which is independent of Citibank and its
affiliates and is the trustee of the trust. In the case of certificates
which are denominated as debt instruments, ``trustee'' also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, provider of other
credit support for, or other contractual counterparty of, a trust.
Notwithstanding the foregoing, a swap counterparty is not an insurer,
and a person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. Obligor means any person, other than the insurer, that is
obligated to make payments with respect to any receivable included in
the trust.
K. Excluded Plan means any plan with respect to which any member of
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Each swap counterparty;
(7) Any obligor with respect to receivables contained in the trust
constituting more than 0.5 percent of the fair market value of the
aggregate undivided interest in the trust allocated to the certificates
of a series, determined on the date of the initial issuance of such
series of certificates by the trust; or
(8) Any affiliate of a person described in Section III.L.(1)-(7).
M. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. Sale includes the entrance into a forward delivery commitment
(as defined in Section III.Q. below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. Forward Delivery Commitment means a contract for the purchase or
sale of one or more certificates to be delivered at an agreed future
settlement date. The term includes both mandatory
[[Page 4056]]
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. Reasonable Compensation has the same meaning as that term is
defined in 29 CFR section 2550.408c-2.
S. Qualified Administrative Fee means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing with respect to
the receivables;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement or described in all
material respects in the prospectus or private placement memorandum
provided to the plan before it purchases certificates issued by the
trust; and
(4) The amount paid to investors in the trust is not reduced by the
amount of any such fee waived by the servicer.
T. Receivables means secured or unsecured obligations of credit
card holders which have arisen or arise in Accounts designated to a
trust. Such obligations represent amounts charged by cardholders for
merchandise and services and amounts advanced as cash advances, as well
as periodic finance charges, annual membership fees, cash advance fees,
late charges on amounts charged for merchandise and services and over-
limit fees and fees of a similar nature designated by card issuers
(other than a qualified administrative fee as defined in Section III.S.
above).
U. Accounts are revolving credit card accounts serviced by Citibank
or an affiliate, which were originated or purchased by Citibank or an
affiliate, and are designated to a trust such that receivables arising
in such accounts become assets of the trust.
V. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust and any supplement thereto pertaining to a particular series of
certificates. In the case of certificates which are denominated as debt
instruments, ``pooling and servicing agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. Early Amortization Event means the events specified in the
pooling and servicing agreement that result (in some instances without
further affirmative action by any party) in an early amortization of
the certificates, including: (1) the failure of the sponsor or the
servicer (i) to make any payment or deposit required under the pooling
and servicing agreement or supplement thereto within five (5) business
days after such payment or deposit was required to be made, or (ii) to
observe or perform any of its other covenants or agreements set forth
in the pooling and servicing agreement or supplement thereto, which
failure has a material adverse effect on investors and continues
unremedied for 60 days; (2) a breach of any representation or warranty
made by the sponsor or the servicer in the pooling and servicing
agreement or supplement thereto that continues to be incorrect in any
material respect for 60 days; (3) the occurrence of certain bankruptcy
events relating to the sponsor or the servicer; (4) the failure by the
sponsor to convey to the trust additional receivables to maintain the
minimum seller interest that is required by the pooling and servicing
agreement and the Rating Agencies; (5) if a class of investor
certificates is in an Accumulation Period, the amount on deposit in the
accumulation account in any month is less than the amount required to
be on deposit therein; (6) the failure to pay in full amounts owing to
investors on the expected maturity date; and (7) the Economic Early
Amortization Event.
X. Series means an issuance of a class or various classes of
certificates by the trust all on the same date pursuant to the same
pooling and servicing agreement and any supplement thereto and
restrictions therein.
Y. Revolving Period means a period of time, as specified in the
pooling and servicing agreement, during which principal collections
allocated to a series are reinvested in newly generated receivables.
Z. Controlled Amortization Period means a period of time specified
in the pooling and servicing agreement during which a portion of the
principal collections allocated to a series will commence to be paid to
the certificateholders of such series in installments.
AA. Accumulation Period means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will be deposited in an account to be
distributed to certificateholders in a lump sum on the expected
maturity date.
BB. CCA or Cash Collateral Account means that certain account,
established by the trustee, that serves as credit enhancement with
respect to the investor certificates and consists of cash deposits and
the proceeds of investments thereon, which investments are permitted
investments, as defined below.
CC. Permitted Investments means investments which: (1) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligation is backed by the
full faith and credit of the United States, or (2) have been rated (or
the obligor has been rated) in one of the three highest generic rating
categories by a Rating Agency; are described in the pooling and
servicing agreement; and are permitted by the Rating Agency.
DD. Group means a group of any number of series offered by the
trust that share finance charge and/or principal collections in the
manner described in the prospectus.
EE. An Economic Early Amortization Event occurs automatically when
finance charge collections averaged over three consecutive months are
less than the total amount payable on the investor certificates,
including (i) amounts payable to, or on behalf of, certificateholders,
with respect to interest, defaults, and chargeoffs, (ii) servicing fees
payable to the servicer, and (iii) any credit enhancement fee payable
to the third-party credit enhancer and allocable to the
certificateholders. With respect to a series to which an Accumulation
Period (as defined above in Section III.AA.) applies, an additional
Economic Early Amortization Event occurs when, for any time during the
Accumulation Period, the yield on the receivables in the Trust is less
than the weighted average of the certificate rates of all series
included in a particular Group within the Trust.
FF. Ratings Effect means the reduction or withdrawal by a Rating
Agency of its then current rating of the investor certificates of any
outstanding series.
GG. Principal Receivables Discount means, with respect to any
account designated by the sponsor, the portion of the related principal
receivables that represents a discount from the face value thereof and
that is treated under the pooling and servicing agreement as finance
charge receivables.
HH. Eligible Swap means an interest rate swap, or (if purchased by
or on behalf of the trust) an interest rate cap, that is part of the
structure of a Series of certificates:
[[Page 4057]]
(1) Which is denominated in U.S. Dollars;
(2) Pursuant to which the trust pays or receives on or immediately
prior to the respective payment or distribution date for the series of
certificates, a fixed rate of interest, or a floating rate of interest
based on a publicly available index (e.g. LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the trust receiving such
payments on at least a quarterly basis and obligated to make separate
payments no more frequently than the swap counterparty, with all
simultaneous payments being netted;
(3) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(4) Which is not leveraged, (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in (2) above, and the difference between the
products thereof, calculated on a one to one ratio and not on a
multiplier of such difference);
(5) Which has a termination date that is the earlier of the date on
which the trust terminates or the related Series of certificates is
fully repaid; and
(6) Which does not incorporate any provision which could cause a
unilateral alteration in a provision described in clauses (1) through
(4) hereof without the consent of the trustee.
II. Eligible Swap Counterparty means a bank or other financial
institution with a rating at the date of issuance of the certificates
by the trust which is in one of the three highest long-term credit
rating categories, or one of the two highest short-term credit rating
categories, utilized by at least one of the Rating Agencies rating the
certificates; provided that, if a swap counterparty is relying on its
short-term rating to establish eligibility hereunder, such counterparty
must either have a long-term rating in one of the three highest long-
term rating categories or not have a long-term rating from the
applicable Rating Agency, and provided further that if the series of
certificates with which the swap is associated has a final maturity
date of more than one year from the date of issuance of the
certificates, and such swap is a Ratings Dependent Swap, the swap
counterparty is required by the terms of the swap to establish any
collateralization or other arrangement satisfactory to the Rating
Agency in the event of a ratings downgrade of the swap counterparty.
JJ. Qualified Plan Investor means a plan investor or group of plan
investors on whose behalf the decision to purchase certificates is made
by an appropriate independent fiduciary that is qualified to analyze
and understand the terms and conditions of any swap transaction used by
the trust and the effect such swap would have upon the credit ratings
of the certificates. For purposes of the proposed exemption, such a
fiduciary is either:
(1) A ``qualified professional asset manager'' (QPAM), as defined
under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13, 1984);\25\
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\25\ PTE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a QPAM, provided certain conditions are met. QPAMs (e.g.
banks, insurance companies, registered investment advisers with
total client assets under management in excess of $50 million) are
considered to be experienced investment managers for plan investors
that are aware of their fiduciary duties under ERISA.
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(2) An ``in-house asset manager'' (INHAM), as defined under Part
IV(a) of PTE 96-23 (61 FR 15975, 15982, April 10, 1996);\26\ or
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\26\ PTE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an INHAM, an entity which
is generally a subsidiary of an employer sponsoring the plan which
is a registered investment adviser with management and control of
total assets attributable to plans maintained by the employer and
its affiliates which are in excess of $50 million.
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(3) A plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such certificates.
KK. Ratings Dependent Swap means an interest rate swap, or (if
purchased by or on behalf of the trust) an interest rate cap contract,
that is part of the structure of a series of certificates where the
rating assigned by the Rating Agency to any series of certificates held
by any plan is dependent on the terms and conditions of the swap and
the rating of the swap counterparty, and if such certificate rating is
not dependent on the existence of such swap and rating of the swap
counterparty, such swap or cap shall be referred to as a ``Non-Ratings
Dependent Swap''. With respect to a Non-Ratings Dependent Swap, each
Rating Agency rating the certificates must confirm, as of the date of
issuance of the certificates by the trust, that entering into an
Eligible Swap with such counterparty will not affect the rating of the
certificates.
LL. Excess Finance Charge Collections means, as of any day funds
are distributed from the trust, the amount by which the finance charge
collections allocated to certificates of a series exceed the amount
necessary to pay certificate interest, servicing fees and expenses, to
satisfy cardholder defaults or charge-offs, and to reinstate credit
support.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
Summary of Facts and Representations
1. The applicants are Citibank (South Dakota), N.A., Citibank
(Nevada), N.A. (together referred to herein as either ``the Banks'' or
``Citibank''), and their Affiliates (collectively, the Applicants).
Each of the Banks is a national banking association and an indirect
wholly-owned subsidiary of Citicorp.
2. The Banks are, collectively, through their securitization trust
vehicles, the largest issuers of credit card receivable asset-backed
securities (ABS) in the United States. As of May 26, 1996, such
vehicles had issued over $46 billion of credit card receivable ABS. The
Banks created Citibank Credit Card Master Trust I (the Trust), formerly
known as Standard Credit Card Master Trust I, in May 1991 by entering
into a pooling and servicing agreement (a Pooling Agreement) with
Yasuda Bank and Trust Company (U.S.A.), as trustee (the Trustee), for
the purpose of securitizing a portion of each Bank's portfolio of
credit card receivables.
Although the Banks, the Trust and the Pooling Agreement are
described herein, the Applicants request an exemption for any master
trust similar to the Trust (a Similar Master Trust) \27\ established by
either of the Banks or an Affiliate pursuant to a pooling and servicing
agreement or other contractual arrangement similar to the Pooling
[[Page 4058]]
Agreement and satisfying the conditions set forth in this proposed
exemption. In addition, although Citibank (South Dakota) is described
as the owner of Accounts and the servicer and a seller with respect to
the Trust, the Applicants request an exemption for any Similar Master
Trust established by the Banks or one or more Affiliates of the Banks,
regardless of the identity or affiliation of the servicer, for which
Citibank or an Affiliate acts as the Master Servicer.
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\27\ With respect to such Similar Master Trusts, Citibank states
that the Small Business Act of 1996 created a new form of statutory
entity called a ``financial asset securitization investment trust''
(FASIT) which may be used to securitize debt obligations such as
credit card receivables, home equity loans, and automobile loans.
The Applicants state that a FASIT is equitably owned by a single
taxable corporation and issues asset-backed securities that are
treated as debt for Federal Income Tax purposes. Activities of a
FASIT are generally limited to holding a portfolio of qualified
loans. For local law purposes, a FASIT might be a trust, a
corporation, or a designated subset of the assets of a trust or a
corporation. The Applicants represent that some certificates covered
by the proposed exemption may be issued by a FASIT, assuming all of
the conditions of the exemption are met including the requirement
that the certificates be issued by a Trust (as defined herein).
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The Series
3. The Pooling Agreement allows the Trust to issue multiple series
of investor certificates (each, a Series) with different coupons,
interest payment dates, maturities and other terms. The assets of the
Trust consist primarily of receivables (the Receivables) from a
portfolio of revolving credit card accounts (the Accounts) and
collections thereon. The Banks are required to provide sufficient
Receivables to allow the reinvestment of principal collections during
the Revolving Period (as discussed below) for a Series. The Banks
retain an ownership interest in the Trust in the form of a seller
certificate. By maintaining this interest, the Banks share with the
certificateholders of each Series a pro rata mutual interest in the
overall credit quality of the Receivables in the Trust.
Investor certificates of a Series may be sold by the Banks directly
to purchasers, through underwriting syndicates led by one or more
managing underwriters, through an underwriter acting alone or through
agents designated from time to time. As of June 25, 1997, investors in
the Trust owned approximately $24.5 billion in certificates issued by
the Trust, comprising 33 outstanding Series. The Banks expect to issue
additional Series evidencing interests in the Trust from time to time.
The Banks may offer additional Series with terms similar to or
significantly different from an outstanding Series. Before issuance of
any new Series, the Banks must receive confirmation from Standard &
Poor's Ratings Group, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co., or Fitch Investors Service, L.P. (a Rating Agency)
that the ratings on any outstanding Series will not be reduced or
withdrawn (a Ratings Effect) as a result of such new issuance. The
particular terms of each Series are determined at the time of sale and
are contained in a supplement to the Pooling Agreement (a Series
Supplement).
The investor certificates of each Series represent beneficial
interests in the assets of the Trust and evidence the right to receive
distributions of principal and interest therefrom. Although
representing beneficial interests in the Trust assets, the investor
certificates have a structure similar to debt instruments, with a
principal amount and a coupon. The investor certificates are treated as
debt for federal income tax purposes, and are also issued in authorized
denominations like debt. Each Series has an expected maturity date (the
Expected Final Payment Date) and a legal final maturity date (the
Series Termination Date). Citibank states that the Expected Final
Payment Date is not the date on which the payment of the security is
legally obligated to be paid. Rather, the Expected Final Payment Date
is the date on which, to a high degree of certainty, collections on the
Receivables are expected to be sufficient to repay the investors.
However, the investors must be repaid by the Series Termination Date
and, if necessary, any interest in the Receivables represented by the
investor certificates of such Series will be sold and the proceeds
distributed to investors to make such repayment.
All Series issued by the Trust to date are subdivided into a senior
class of investor certificates and a junior or subordinated class of
investor certificates, or have the benefit of third-party credit
support such that a person other than an investor in senior
certificates bears the initial risk of loss. In this regard, Citibank
represents that the particular class of certificates for each series to
which this proposed exemption would apply (an Exempt Class) will have
credit support provided to the Exempt Class through either a senior-
subordinated series structure or other form of third party credit
support which, at a minimum, will represent five (5) percent of the
outstanding principal balance of certificates issued for the Exempt
Class, so that an investor in the Exempt Class will not bear the
initial risk of loss.
The subdivision of a Series into two classes, along with the credit
enhancement discussed herein, permits the senior or Class A
certificates to receive an ``AAA'' rating, the highest possible
investment grade rating. The subordinate or Class B certificates also
receive an investment grade rating, typically ``A''. The ratings
address the likelihood that investors will receive all interest when
due and principal by the legal final maturity date. As discussed in
more detail below, these ratings are based upon, among other things,
(i) the historical performance of the Receivables arising in the
Accounts, (ii) a loan made by a third party financial institution to a
cash collateral account (CCA) established by the Trustee to serve as
credit enhancement for the Class A and Class B Certificates or other
credit enhancement, and (iii) in the case of the Class A Certificates,
the subordination of the Class B Certificates.
The Applicants state that if a CCA is used as credit enhancement
for a Series, only cash in the form of a loan will be contributed or
deposited in a CCA. The loans made to a CCA will be made by third-party
financial institutions, unrelated to Citibank. The Trustee will have
the right to draw on the CCA under the terms of the Series supplement
to the Pooling Agreement and the related loan agreement for the CCA.
Cash deposits held in a CCA will be invested in certain permitted
investments, as described in the Pooling Agreement, and such
investments will be either highly rated or otherwise approved by a
Rating Agency. The Applicants state further that not all Series will
have the benefit of a CCA. Some Series will have other forms of credit
enhancement (such as a letter of credit or a reserve fund) as set forth
in the applicable prospectus supplement for the Series.
In general, under current Rating Agency guidelines for the Master
Trust, the Class A Certificates comprise 94 percent of the principal
amount of a Series and the Class B Certificates comprise 6 percent of
the principal amount of a Series. Citibank states that where a CCA is
used as enhancement for a Series, the CCA will be funded at closing in
an amount generally equal to 7 percent of the principal amount of the
Series. The CCA is often further divided into a 5 percent shared CCA,
which is shared by the Class A and Class B Certificateholders, but with
the Class A Certificateholders having priority, and a 2% Class B CCA,
which is for the exclusive benefit of the Class B Certificateholders.
The CCA provider receives a monthly fee for providing the loan. This
fee is deducted from the monthly finance charge collections allocated
to the Series, but only after first deducting amounts payable to, or on
behalf of, the investor certificateholders of such Series, as described
below.
Citibank represents that the Trust may commence a new program (the
``MTC Program'') for the issuance of a new Series of investor
certificates to be comprised of senior certificates (Series A
Certificates) and subordinate certificates (Series B Certificates).
Under the MTC Program, the Series B Certificates will be subordinated
to each Series of Series A Certificates, in accordance with the current
Rating Agency guidelines. The Series issued under the MTC Program will
also have the benefit of a common CCA which
[[Page 4059]]
will be funded in an amount sufficient to permit each of the Series A
Certificates to receive an ``AAA'' rating and each of the Series B
Certificates to receive at least an ``A'' rating.
The Receivables and the Accounts
4. The Receivables conveyed by the Banks to the Trust consist of
all amounts charged by cardholders for merchandise and services and
amounts advanced as cash advances (Principal Receivables), and all
periodic finance charges, annual membership fees, cash advance fees,
late charges on amounts charged for merchandise and services and
certain other fees designated by the Banks (Finance Charge
Receivables). Citibank states that as of April 21, 1997, the Trust had
$35,677,604,475 in Receivables, of which $35,175,269,487 were Principal
Receivables and $502,335,488 were Finance Charge Receivables. The
Receivables conveyed to the Trust to date were generated under the VISA
or MasterCard \28\ programs and were either originated by Citibank or
purchased by Citibank from other credit card issuers. Citibank states
that other credit card receivables may be included in the Trust so long
as the eligibility criteria discussed herein are met.
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\28\ VISA and MasterCard are registered trademarks of VISA
U.S.A., Inc. and MasterCard International Incorporated,
respectively.
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The Accounts are owned by Citibank (South Dakota), but a
participation in the Receivables in certain of the Accounts was sold to
Citibank (Nevada) prior to their conveyance to the Trust. The Accounts
have been selected from substantially all of the Eligible Accounts (as
defined under ``Eligibility Criteria'' below) in the credit card
portfolio of Citibank (South Dakota) (referred to herein as ``the
Portfolio''). Citibank (South Dakota) believes that the Accounts are
representative of the Eligible Accounts in the Portfolio. Citibank
represents in the Pooling Agreement that the inclusion of the Accounts,
as a whole, does not represent an adverse selection from among the
Eligible Accounts.
The Pooling Agreement designates Citibank (South Dakota) to service
the Accounts on behalf of the Trust, including collecting payments due
under the Receivables. Citibank, as the servicer of the Trust, receives
fees for its services from the Trustee or sponsor of the Trust.
Citibank states that the sum of all payments made to and retained by
Citibank, as the servicer of the Trust, which are allocable to the
series of certificates purchased by a plan, will represent not more
than reasonable compensation for such services and reimbursement of any
reasonable expenses in connection therewith. Citibank, in its role as
servicer of the Receivables in the Trust, does not receive fees from
other persons other than the Trustee or sponsor. Citibank may receive
fees from others for activities unrelated to the Trust, and may receive
payments from obligors on Receivables in the Trust because it has some
other relationship to the obligors, such as the provider of credit card
insurance. In this regard, Citibank states that the proposed exemption
would permit it to receive a ``qualified administrative fee'' (as
defined in Section III.S) from a person other than the Trustee or
sponsor of the Trust under circumstances which are similar to those
which were permitted in the Underwriter Exemptions.
Principal receivables are sold to the Trust at par (or, as
discussed below, at a discount to par) in exchange for a seller
certificate or to maintain investor certificates during the Revolving
Period. Each dollar of investor certificates entitles an investor to a
dollar of principal receivables. Prior to transferring principal
receivables to the Trust, Citibank may redesignate a portion of
principal receivables to be classified as finance charge receivables
(a/k/a the Principal Receivables Discount). This allows Citibank to
transfer lower yielding receivables to the Trust at a discount from
their par value and to treat the discounted portion of the principal
receivables collected as finance charge receivables (a Discount
Option). The Discount Option enables Citibank to add receivables
relating to credit card accounts with relatively low finance charge
rates without adversely effecting the ``excess spread'' between the
certificate rate and the overall net yield on the receivables held in
the Trust. The discounted portion of the principal receivables is not
counted toward any requirements for maintaining the ``required minimum
principal balance'' (as discussed below). Citibank states that the
redesignation of principal receivables as finance charge receivables
will not disadvantage investors as each dollar of investor certificates
will always be entitled to a dollar of principal receivables held in
the Trust.
Upon the sale of investor certificates, the transaction between
Citibank and the Trust is characterized as a sale for generally
accepted accounting principals. However, legal opinions issued in
connection with such a sale may conclude that the transaction is either
an absolute transfer of the receivables to the Trust or, in the
alternative, a grant of a perfected security interest in the
Receivables for the benefit of certificateholders in the Trust.
The Pooling Agreement sets forth the various requirements governing
the quantity and quality of Receivables that may be included in the
Trust. In connection with any conveyance to the Trust, Citibank must
make certain representations and warranties regarding the Receivables,
including that the Receivables to be conveyed meet eligibility criteria
described below and specified in the Pooling Agreement. Citibank also
must maintain the level of Principal Receivables at or above a certain
minimum amount specified by the Rating Agencies (see discussion of
additions of accounts in Paragraph 7 below).
Notwithstanding such requirements, the Pooling Agreement contains
provisions analogous to the collateral substitution provisions in a
loan agreement or indenture relating to a secured loan, which permit
Citibank, subject to certain conditions imposed by the Rating Agencies,
to designate new Accounts or remove certain Accounts, to cause the
reassignment to Citibank of previously conveyed Receivables and,
subject to certain limitations, to change the underlying terms of the
Accounts with cardholders.
5. Representations and Warranties. On the issuance date for a
Series of investor certificates, Citibank makes representations and
warranties to the Trust relating to the Receivables and Accounts to the
effect, among other things, that:
(a) Each Account was an Eligible Account (as defined under the
``Eligibility Criteria'' below), generally as of the date the
Receivables arising therein were initially conveyed to the Trust;
(b) Each of the Receivables then existing in the Accounts is an
Eligible Receivable; and
(c) As of the date of creation of any new Receivable, such
Receivable is an Eligible Receivable.
The Pooling Agreement provides that if Citibank breaches any such
representation or warranty, and such breach has a material adverse
effect on the investor certificateholders' interest, as determined by
the Trustee, the Receivables with respect to the affected Account will
be reassigned to Citibank if the breach remains uncured after a
specified period of time.
Citibank states that it also represents and warrants to the Trust,
among other things, that as of the issuance date for a Series of
investor certificates the Pooling Agreement and Series
[[Page 4060]]
Supplement thereto creates a valid sale, transfer and assignment to the
Trust of all right, title and interest of Citibank in the Receivables
or the grant of a first priority perfected security interest under the
Uniform Commercial Code as in effect in South Dakota and Nevada in such
Receivables. If Citibank breaches such representation or warranty, and
such breach has a material adverse effect on the investor
certificateholders' interest, the Trustee or the holders of the
investor certificates may direct Citibank to accept the reassignment of
the Receivables in the Trust and transfer funds to the Trust in an
amount equal to the outstanding principal amount of the investor
certificates plus accrued interest thereon.
6. Eligibility Criteria. An Eligible Account is a credit card
account owned by Citibank (South Dakota) which: (a) is in existence and
maintained by Citibank (South Dakota); (b) is payable in U.S. dollars;
(c) in the case of initial Accounts, has a cardholder with a billing
address located in the United States or its territories or possessions
or a military address; (d) has a cardholder who has not been identified
as being involved in a voluntary or involuntary bankruptcy proceeding;
(e) has not been identified as an Account with respect to which the
related card has been lost or stolen; (f) has not been sold or pledged
to any other party; (g) does not have receivables which have been sold
or pledged to any other party; and (h) in the case of the Accounts
initially assigned to the Trust, is a VISA or MasterCard revolving
credit card account.
An Eligible Receivable is a Receivable: (a) Which has arisen under
an Eligible Account; (b) which was created in compliance in all
material respects with all requirements of law and pursuant to a credit
card agreement which complies in all material respects with all
requirements of law; (c) with respect to which all material consents,
licenses, approvals or authorizations of, or registrations with, any
governmental authority required to be obtained or given in connection
with the creation of such Receivable or the execution, delivery,
creation and performance by Citibank (South Dakota) or by the original
credit card issuer, if not Citibank (South Dakota), of the related
credit card agreement have been duly obtained or given and are in full
force and effect; (d) as to which at the time of its transfer to the
Trust, the Banks or the Trust have good and marketable title, free and
clear of all liens, encumbrances, charges and security interests; (e)
which has been the subject of a valid transfer and assignment from the
Banks to the Trust of all the Banks' right, title and interest therein
or the grant of a first priority perfected security interest therein
(and in the proceeds thereof); (f) which will at all times be a legal,
valid and binding payment obligation of the cardholder thereof
enforceable against such cardholder in accordance with its terms,
subject to certain customary exceptions relating to the bankruptcy of
the cardholder; (g) which at the time of its transfer to the Trust, has
not been waived or modified except as permitted under the Pooling
Agreement; (h) which is not at the time of its transfer to the Trust
subject to any right of rescission, set off, counterclaim or defense
(including the defense of usury), other than certain bankruptcy-related
defenses; (i) as to which Citibank has satisfied all obligations to be
fulfilled at the time it is transferred to the Trust; (j) as to which
Citibank has done nothing, at the time of its transfer to the Trust, to
impair the rights of the Trust or investor certificateholders of a
Series therein, and (k) which constitutes either an ``account'' or a
``general intangible'' under the Uniform Commercial Code as then in
effect under South Dakota or Nevada state law.
7. Additions of Accounts. To maintain Citibank's seller interest in
the Trust, the Pooling Agreement contains provisions analogous to
collateral maintenance requirements under a secured loan that require
Citibank to designate new Accounts (the receivables in which will be
conveyed to the Trust) if, as of the end of any calendar week, the
total amount of Principal Receivables in the Trust is less than the
amount required by the Rating Agencies (the Required Minimum Principal
Balance).
The Pooling Agreement provides that Citibank will be required to
make a Lump Sum Addition to the Trust in the event that the amount of
Principal Receivables is not maintained at a minimum level equal to the
greater of: (a) 107 percent of the sum of the invested amounts of all
outstanding investor certificates of all Series, or (b) 102 percent of
the sum of the initial invested amounts of all outstanding investor
certificates of all Series (or, if applicable for a particular Series,
the highest invested amount during a Due Period,29 or,
during any accumulation period, scheduled amortization period, early
amortization period or Class A amortization period, the highest
invested amount during the Due Period preceding the first Due Period
for such accumulation scheduled amortization period, early amortization
period or Class A amortization period). Citibank may, upon 30 days
prior notice to the Trustee, the Rating Agency and any provider of
Series credit enhancement, reduce the Required Minimum Principal
Balance, provided that such reduction will not result in (1) a
reduction or withdrawal of any Rating Agency's rating of the investor
certificates of any outstanding Series, or (2) an adverse effect, as
defined in the Pooling Agreement (an Adverse Effect) on the
certificateholders of any Series, and provided further that the
Required Minimum Principal Balance may never be less than 102 percent
of the sum of the initial invested amounts of all outstanding investor
certificates of all Series (or, if applicable for a particular Series,
the highest invested amount during a Due Period, or, during any
scheduled amortization period, early amortization period or Class A
amortization period, the highest invested amount during the Due Period
preceding the first Due Period for such scheduled amortization period,
early amortization period or Class A amortization period).
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\29\ A Due Period refers to the monthly period beginning at the
close of business on the fourth-to-last business day of each month
and ending at the close of business on the fourth-to-last business
day of the immediately following month.
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As previously noted, the requirement that Citibank maintain
Principal Receivables in an amount at least equal to the Required
Minimum Principal Balance is one mandated by the Rating Agencies. The
purpose of the Required Minimum Principal Balance is to ensure that
Citibank's interest in the Trust is large enough to absorb dilution
caused by obligors returning merchandise originally charged under their
Account (``Returns'') and possible seasonal fluctuations in the
Receivables. In assessing the size of the Required Minimum Principal
Balance, Rating Agencies generally consider a number of factors
including historical portfolio dilution, the timing of Returns, the
portfolio composition, rebate programs and the structural provisions
designed to ensure that a minimum amount of Principal Receivables is
maintained. The Rating Agencies must affirmatively confirm by written
notice to the Trustee that any reduction in the Required Minimum
Principal Balance will not result in the reduction or withdrawal of the
rating assigned to any outstanding Series or class of investor
certificates.
Conveyance of additional receivables (i.e. a Lump Sum Addition) may
consist of:
(a) Receivables arising in additional Eligible Accounts from the
Portfolio;
(b) Receivables arising in portfolios of revolving credit card
accounts acquired
[[Page 4061]]
by the Banks from other credit card issuers;
(c) Receivables arising from certain non-premium and premium
MasterCard and VISA credit card accounts previously transferred by
Citibank to certain trusts in securitization transactions that have
matured or terminated;
(d) Receivables arising in any other revolving credit card accounts
of a type which have not been previously included in the Accounts;
30 and/or
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\30\ Because additional Accounts may not be accounts of the
same type as previously included in the Trust, Citibank states that
there can be no assurance that such additional Accounts will be of
the same credit quality as the initial Accounts or the additional
Accounts currently included in the Trust. In addition, such
additional Accounts may consist of credit card accounts which have
different terms than the initial Accounts, including lower periodic
finance charges, which may have the effect of reducing the average
yield on the portfolio of Accounts. However, as with any removal of
any Accounts, the designation of additional Accounts will be subject
to the satisfaction of certain conditions required by the Rating
Agencies, including that (i) such addition will not result in a
Ratings Effect (i.e. a lower credit rating for the certificates),
and (ii) Citibank must deliver to the Trustee and any provider of
credit enhancement for the Series a certificate of an authorized
officer to the effect that, in the reasonable belief of Citibank,
such addition will not at the time of such addition or at a future
date cause an early amortization event or adversely affect the
timing or amount of payments to certificateholders (referred to in
the Series prospectus as an ``Adverse Effect''--see Paragraph 8
regarding the Reassignment of Receivables for further discussion of
an Adverse Effect).
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(e) Participations in a pool of receivables.
After giving effect to a Lump Sum Addition, the total amount of
Principal Receivables in the Trust will at least equal the Required
Minimum Principal Balance. In addition, subject to the conditions
contained in the Pooling Agreement, Citibank may from time to time, at
its sole discretion, voluntarily make a Lump Sum Addition to the Trust.
Subject to limitations and conditions in the Pooling Agreement,
Citibank from time to time may also designate, at its sole discretion,
Receivables in newly originated Eligible Accounts to be included as
Accounts (New Accounts). By adding Receivables in New Accounts, the
Seller's interest will be increased, but the Seller and the investors
will share interests in all of the Receivables, including all those
arising in New Accounts and in Accounts previously assigned to the
Trust. Citibank has designated New Accounts (the Receivables in which
have been added to the Trust) since the creation of the Trust, and
Citibank may continue to do so in the future. To protect the Trust from
dramatic changes in composition, the number of New Accounts Citibank
may designate with respect to any specified three month period may not
exceed 15 percent of the number of Accounts as of the first day of such
period, and the number of New Accounts designated during any calendar
year may not exceed 20 percent of the number of Accounts as of the
first day of such calendar year. The Pooling Agreement also requires
Citibank to deliver an opinion of counsel semi-annually with respect to
the New Accounts included as Accounts, confirming the validity of each
transfer of Receivables in such New Accounts.
8. Reassignment of Receivables. Citibank has the right to require
the reassignment to Citibank of the Receivables with respect to certain
Accounts. Citibank represents that it may desire such a reassignment,
for example, to set up a new master trust or other securitization
vehicle. However, such a reassignment may only occur upon satisfaction
of certain conditions in the Pooling Agreement under guidelines
established by the Rating Agencies, which are described in the Series
prospectus. Citibank states that in order to satisfy such conditions,
the Rating Agencies must confirm in advance that such reassignment will
not cause the rating assigned to any outstanding Series or class of
investor certificates to be withdrawn or reduced. In addition, Citibank
must deliver an officers' certificate to the effect that Citibank
reasonably believes that such reassignment will not, at the time of its
occurrence or a future date: (a) Cause an early amortization event; (b)
cause a reduction of the amounts of surplus finance charge collections
with respect to any Series of investor certificates below the level
required by the Rating Agencies; or (c) adversely affect the amount or
timing of payments to investor certificateholders of any Series.
Only after satisfaction of these and other conditions set forth in
the Series prospectus 31 for the removal of Accounts from
the Trust will the Trustee execute and deliver to Citibank a written
reassignment to reconvey to Citibank, without recourse, the Receivables
arising in Removed Accounts (Removed Accounts).
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\31\ The complete conditions specified by the Series prospectus
for the removal of Accounts from the Trust are as follows:
(a) on or before the fifth business day immediately preceding
the date upon which such Accounts are to be removed, Citibank will
give the Trustee, the Servicer, the Rating Agency and any provider
of credit support (i.e., Series Enhancement) written notice of such
removal specifying the date for removal of the Removed Accounts (the
Removal Date);
(b) on or prior to the date that is five business days after the
Removal Date, Citibank will deliver to the Trustee a list of the
Removed Accounts specifying for each such Account, as of the removal
notice date, its account number, the aggregate amount outstanding in
such Account and the aggregate amount of Principal Receivables
outstanding in such Account;
(c) Citibank will represent and warrant as of each Removal Date
that the list of Removed Accounts delivered pursuant to (b) above,
as of the Removal Date, is true and complete in all material
respects;
(d) the Trustee shall have received advance confirmation from
the Rating Agency that such removal will not result in a Ratings
Effect;
(e) Citibank will deliver to the Trustee and any provider of
Series Enhancement a certificate of an authorized officer, dated as
of the Removal Date, to the effect that Citibank reasonably believes
that such removal will not at the time of its occurrence or at a
future date cause an Adverse Effect (i.e., the occurrence of an
early amortization event for any Series or a reduction of the amount
of surplus finance charge collections below the level required by
the Rating Agencies, or an event which adversely affects in any
manner the timing or amount of payments to investor
certificateholders of any Series or any enhancement invested
amounts); and
(f) Citibank will deliver to the Trustee, the Rating Agency and
any provider of Series Enhancement an opinion of counsel acceptable
to the Trustee that for federal and state tax law purposes: (i)
Following such removal the Trust will not be an association (or
publicly traded partnership) taxable as a corporation, and (ii) such
removal will not adversely affect the characterization of the
investor certificates of any Series as debt and will not cause a
taxable event to holders of any such investor certificates.
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9. Modification to the Underlying Terms of the Accounts. Each
cardholder is subject to an agreement governing the terms and
conditions of such cardholder's Account. Pursuant to such agreement,
Citibank (South Dakota), as owner of the Accounts, has the right to
change or terminate any terms, conditions, services or features of the
Accounts (including increasing or decreasing periodic finance charges
or minimum payments). Citibank has covenanted in the Pooling Agreement
that, except as otherwise required by any requirement of law or as is
deemed necessary by Citibank to maintain its credit card business on a
competitive basis, it will not take actions which would reduce the net
portfolio yield on the Receivables (after subtracting therefrom the
amount of Principal Receivables that were written off as uncollectible)
to be less than the sum of: (a) the weighted average certificate rate
of each class of investor certificates of each Series; and (b) the
weighted average of the net servicing fee rate allocable to each class
of investor certificates of each Series. In addition, Citibank has
agreed in the Pooling Agreement that, unless required by law, it will
not reduce such net portfolio yield to less than the highest
certificate rate for any outstanding Series or class. Citibank also has
covenanted in the Pooling Agreement that it will change
[[Page 4062]]
the terms relating to the Accounts designated to the Trust only if such
change is made applicable to the comparable segment of the portfolio of
Accounts owned or serviced by Citibank which are part of the same
program or which have the same or substantially similar
characteristics. The ability of Citibank to change the terms of the
Accounts is necessary to meet the competitive demands of the
marketplace.
Citibank states that it offers a variety of different underwriting
standards and terms on its credit card accounts. For example, Citibank
offers Gold Visa cards and Regular Classic Visa cards. Citibank also
offers ``co-branded'' cardholder programs, in conjunction with, among
others, American Airlines, under which cardholders can earn frequent
flyer miles or credits to be applied to the purchase price of goods or
services. With respect to such programs, some Accounts are designated
to the Trust and some are not. If Citibank determines to change an
underwriting standard or cardholder agreement terms under one of these
programs, Citibank does so without distinguishing those affected
Accounts designated to the Trust from those affected Accounts which are
not designated to the Trust. This failure to distinguish is mandated by
the Pooling Agreement and the Rating Agencies. Citibank's decisions are
fundamentally decisions with respect to how to operate its business in
a competitive manner and will not treat Accounts designated to a Trust
any differently than other Accounts.
Citibank states that if changes to underwriting standards or
cardholder agreement terms were to adversely affect the performance of
the Receivables in the Trust (e.g. cause an increase in charge-offs or
defaults, or a lower yield on the Receivables), investors are protected
by the early amortization event triggers (as discussed further in
Paragraphs 13 and 14 below) and credit enhancement. In order for
certificates issued by the Trust to obtain a high credit rating, there
must be sufficient credit enhancement to meet the Rating Agency's
``high stress'' scenarios to ensure full and timely payment of
principal and interest. In this regard, an ``economic early
amortization event'' occurs immediately upon the occurrence of either
of the two events specified in Paragraph 14 below, without any notice
or other action on the part of the Trustee or the certificateholders.
Pass-Through of Cardholder Payments
10. Cardholder payments for each month are separated into principal
collections and finance charge collections, both of which, as well as
defaults on Principal Receivables, are allocated to each Series and to
Citibank pro rata based on the relative interest of each in the Trust.
Investors will, however, receive a fixed allocation of principal
collections during the Accumulation or Amortization Period. Citibank's
interest in the Trust represents the portion of the Principal
Receivables in the Trust that is not represented by investor
certificates. Finance charge collections are used to pay the coupon on
the investor certificates of each Series, as well as to pay the
servicing costs and cover defaults on principal payments due from
cardholders. Principal collections are typically reinvested in new
Receivables and/or allowed to accumulate for a period of time, rather
than distributed immediately to investors, so that the investor
certificates' payment characteristics will mirror those of comparable
long-term debt instruments. However, the Pooling Agreement specifies
Early Amortization Events following the occurrence of which all
principal collections will commence being distributed to investors.
11. Principal Collections. If principal collections that were
allocated to a Series were immediately distributed to the investors,
the investors would be quickly repaid. For example, Citibank states
that in 1996 the average monthly cardholder principal payment rate was
18.46 percent, which means all investors would be repaid over a six-
month period assuming all Series in the Trust simultaneously amortize.
To structure the investor certificates so as to perform as if they were
long-term debt instruments, principal collections allocated to a Series
are reinvested in newly generated Receivables arising in the Accounts
for a period of time specified in the Series Supplement (i.e., the
Revolving Period). Reinvestment in Receivables during the Revolving
Period maintains the principal amount of the Series invested in the
Trust for such period. At the end of the Revolving Period, shortly
before the expected maturity date, a portion of the principal
collections allocated to a Series either will commence to be paid to
the investor certificateholders of such Series in monthly installments
(a Controlled Amortization Period) or will be deposited in an account
to be distributed to such certificateholders in a lump sum on the
expected maturity date (an Accumulation Period), depending on the terms
specified in the related Series Supplement. Generally, each of the
recently issued Series has: (i) an eleven-month Accumulation Period for
the Class A Certificates, which may be shortened (and the Revolving
Period extended) according to an objective formula used to project the
level of principal collections in the Trust; and (ii) a one-month
accumulation period for the Class B Certificates.
12. Finance Charge Collections. Finance charge collections that are
allocated to Series belonging to the same Group are pooled together and
then shared among all Series in the Group based on the amount of total
expenses of each Series for coupon, losses and servicing fees.
32 All Series issued to date have been designated as
belonging to Group One. As a result of this reallocation of finance
charges, those Series that have higher coupons will receive a
proportionately larger share of the finance charge income and thus may
avoid suffering a shortfall which might occur if finance charge income
were allocated based on the relative interest (based on aggregate
principal amounts) of such Series in the Trust. However, if finance
charge income is not sufficient to cover total expenses in Group One,
all Series within Group One will share proportionately in the shortfall
regardless of the interest rate of the investor certificates of an
individual Series. Finance charge collections allocable to a Series
belonging to one Group will not impact finance charge collections
allocable to any Series belonging to a different Group.
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\32\ In addition, Citibank states that in some instances
principal collections on receivables allocated to a particular
Series may be shared with other Series within the same Group,
provided that the minimum principal receivable balances required by
the Rating Agencies for all Series within the Group are maintained.
However, Citibank states further that under its current payment
structure, principal collections on receivables allocated to a
particular Series are usually not shared.
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All Series issued under the MTC Program will be designated as
belonging to Group Two. Finance charge collections that are allocated
to Series belonging to Group Two will be pooled together and then
shared the same way as the Series which are included in Group One.
Early Amortization Events
13. Citibank represents that an earlier than scheduled payout of
principal to investor certificateholders of a Series will occur under
certain circumstances specified in the Pooling Agreement (each
condition is described as an Early Amortization Event).
Generally, Early Amortization Events include:
[[Page 4063]]
(a) The failure of the Bank to either (i) make any payment or
deposit required under the Pooling Agreement or any Series Supplement
within five (5) business days after such payment or deposit was
required to be made, or (ii) observe or perform any of its other
covenants or agreements set forth in the Pooling Agreement or any
Series Supplement, which failure has a material adverse effect on
investors and continues unremedied for 60 days;
(b) A breach of any representation or warranty made by Citibank in
the Pooling Agreement or any Series Supplement which continues to be
uncorrected in any material respect for 60 days;
(c) The occurrence of certain bankruptcy events relating to either
Bank (an Insolvency Event);
(d) The failure by the Banks to make a Lump Sum Addition;
(e) The occurrence of any servicer default by Citibank;
(f) If a class of investor certificates is in an Accumulation
Period, the amount on deposit in the accumulation account in any month
is less than the amount required to be on deposit therein;
(g) The failure to pay in full amounts owing to investors on the
expected maturity date; and
(h) The Economic Early Amortization Event described below.
Each Series Supplement may contain other Early Amortization Events
for the related Series in addition to those specified in the Pooling
Agreement. To date, no Early Amortization Event has occurred with
respect to any Series of investor certificates issued by the Trust.
Citibank has no discretion with respect to the determination
whether an Early Amortization Event has occurred. However, certain
Early Amortization Events, such as the breach of a representation or
warranty, are qualified by materiality and may be declared at the
option of the Trustee. Citibank states that in light of the complexity
of these securitization transactions, such flexibility is intended to
permit the Trustee to act in the best interests of investor
certificateholders, which may be to forego early amortization by reason
of a mere technical violation. Other Early Amortization Events, such as
the Economic Early Amortization Event, are not qualified by materiality
and operate automatically. In effect, such events are always material.
The occurrence of an Early Amortization Event will cause the
Revolving Period, Controlled Amortization Period or Accumulation
Period, as may be applicable, to end and principal collections will be
used thereafter to make monthly payments of principal to the investor
certificateholders of such Series (i.e. an Early Amortization Period)
until the earlier of payment in full of the outstanding principal
amount of the certificates of such Series or the legal final maturity
date for such Series specified in the related Series Supplement. If an
Accumulation Period has already begun for a Series, then all monies
that have been previously deposited in an accumulation account for such
Series will be withdrawn upon the occurrence of an Early Amortization
Event and paid to the investor certificateholders of such Series.
In addition to the foregoing consequences of an Early Amortization
Event described above, if an Insolvency Event occurs, Citibank will
immediately cease to transfer Receivables to the Trust. Thereafter,
unless the requisite number of investor certificateholders instruct
otherwise, the Trustee will sell or otherwise liquidate the Receivables
in the Trust in a commercially reasonable manner and on commercially
reasonable terms. The proceeds of such sale or liquidation will be
applied first to payments on the Class A Certificates, then to the
Class B Certificates.
14. Economic Early Amortization Events. Citibank represents that
all outstanding Series include an Economic Early Amortization Event,
which is triggered if finance charge collections averaged over three
consecutive months are less than the total amounts payable with respect
to the Class A and Class B Certificates (including amounts payable with
respect to interest, servicing fees, defaults, charge-offs and any
credit enhancement fee).\33\ Upon the occurrence of an Economic Early
Amortization Event, monies on deposit in the CCA will be used to make
payments of principal to the Class A Certificateholders and Class B
Certificateholders. However, Citibank states that because the amount on
deposit in a CCA is likely to be insufficient to pay outstanding
principal amounts in full, additional collections with respect to the
Receivables will be required to fully pay down the certificates. Thus,
the Trust generally will depend on several forms of credit enhancement
[e.g. ``excess spread'' between the Receivables and the certificate
rate, subordination of the Class B Certificates, letters of credit or
other third party credit enhancement], as well as any interest rate
swap transactions (as discussed in Paragraph 16 below) and the
maintenance of the ``required minimum principal balance'' for the
Receivables under guidelines set by the Rating Agencies, to ensure
timely repayment of principal and interest to the certificateholders.
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\33\ The Series to which an Accumulation Period applies contain
an additional Economic Early Amortization Event which is triggered
if, during the Accumulation Period, the yield on the Receivables in
the Trust is less than the weighted average of the certificate rates
of all Series included in the Group.
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Utilization of Credit Support--The Role of the Master Servicer and the
Role of the Trustee
15. The servicer of Citibank's credit card ABS does not supply
credit support. Further, if the servicer fails to call upon a credit
support mechanism to produce needed funds, the Trustee may exercise its
rights as beneficiary of the credit support to obtain the funds under
the credit support mechanism. Therefore, in all cases, the Trustee will
be ultimately responsible for deciding when to exercise its rights as
beneficiary of the credit support.
In some cases, the servicer or an affiliate will be required under
the terms of the Pooling Agreement to provide liquidity (but not
credit) advances to the Trust. In these cases, the servicer will
advance funds to cover shortfalls and will be reimbursed on the
following distribution date from collections on the Receivables or
Series credit support. The servicer will not be required to make any
such liquidity advance unless there is sufficient Series credit support
available to ensure repayment of the liquidity advance on the following
distribution date. If the servicer fails to advance funds in respect of
a shortfall when obligated to do so, the Trustee will exercise its
rights under any available credit support on the following distribution
date to obtain the necessary funds under the credit support mechanism.
The servicer has servicing guidelines which include a general
policy as to the allowable delinquency period after which Receivables
ordinarily are deemed uncollectible. The Pooling Agreement requires the
servicer to follow its normal servicing guidelines and also sets forth
in the definition of Defaulted Receivables the servicer's general
policy as to the period of time after which delinquent Receivables will
be considered uncollectible.
On a monthly basis the servicer is required to report to the
Trustee the amount of all past-due payments along with other current
information as to collections on the Receivables and draws upon, or
payments to be made from, the credit support. Further, the servicer is
required to deliver to the Trustee annually a certificate of an officer
of the servicer stating that a review of the servicing activities has
been made under such officer's
[[Page 4064]]
supervision, and either stating that the servicer has fulfilled all of
its obligations under the Pooling Agreement or, if the servicer has
defaulted under any of its obligations, specifying any such default.
The servicer's reports are reviewed annually by independent accountants
to ensure that the servicer is following its normal servicing standards
and that the servicer's reports conform to the servicer's internal
accounting records. The results of the independent accountant's review
are delivered to the Trustee.
Interest Rate Swap Agreements by the Trust
16. For certain Series of certificates, the Trust will have the
benefit of interest rate swap agreements for the exclusive benefit of
the Class A Certificateholders (the Class A Interest Rate Swap) and/or
interest rate swap agreements for the exclusive benefit of the Class B
Certificateholders (the Class B Interest Rate Swap). Citibank (South
Dakota) and Citibank (Nevada) may be the counterparties to the Trust
for these Interest Rate Swaps.\34\
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\34\ Banks or financial institutions other than Citibank may be
swap counterparties to the Trust on other interest rate swaps. In
addition, an interest rate ``cap'' could be used where the Trust
issues floating rate certificates. In such instances, a counterparty
would be paid a premium in advance by Citibank (from its own funds).
Under the interest rate cap agreement, if the floating rate on the
certificates were to rise above a specified rate (i.e. the cap
rate), the counterparty would be required to provide the Trust with
the amounts in excess of the cap rate necessary to pay the balance
of the interest on the certificates.
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Pursuant to the terms and conditions of the Interest Rate Swaps,
the Trust will be obligated to make certain payments periodically to
the swap counterparty based on either a fixed or floating interest
rate. In turn, the swap counterparty will be obligated to make payments
periodically to the Trust based on either a fixed or floating interest
rate. Payments received by the Trust pursuant to the Class A Interest
Rate Swaps will be available to pay interest due on the Class A
Certificates on each Class A interest payment date and payments
received by the Trust pursuant to the Class B Interest Rate Swaps will
be available to pay interest due on the Class B Certificates on each
Class B interest payment date. The Trust will also have the benefit of
funds on deposit in a CCA or other applicable credit support.
As an example, Citibank has submitted information for the Series of
certificates issued by the Trust on August 29, 1996 (known as
$750,000,000 Floating Rate Class A Credit Card Participation
Certificates, Series 1996-5 and $48,000,000 Floating Rate Class B
Credit Card Participation Certificates, Series 1996-5). On the Series
issuance date (August 29, 1996), the Trustee of the Trust, for the
exclusive benefit of the Class A Certificateholders, entered into two
Class A Interest Rate Swaps with Citibank (South Dakota) and Citibank
(Nevada), respectively, which together had a combined notional amount
as of any swap payment date equal to the outstanding principal amount
of the Class A Certificates as of the close of business on the
preceding distribution date.
Interest with respect to the investor certificates accrues from
August 29, 1996 and is payable quarterly on the fifteenth day of March,
June, September and December, commencing December 15, 1996. Pursuant to
the Class A Interest Rate Swaps, on the business day preceding each
distribution date, payments are made by the Trust to Citibank (if the
following is a positive number), or by Citibank to the Trust (if the
following is a negative number) of an amount in the aggregate equal to:
\35\
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\35\ If such amount is positive, it will be referred to as the
``Class A Net Swap Payment'', and if such amount is negative, it
will be referred to as the ``Class A Net Swap Receipt'.
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(i) one quarter of the product of
(A) the Class A Notional Amount; and
(B) 6.8691 percent (the Class A Swap Rate); minus
(ii) the product of
(A) a fraction, the numerator of which is the actual number of days
from and including the prior distribution date (excluding the related
distribution date), and the denominator of which is 360; \36\
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\36\ The day count fraction used in any swap would correspond to
the day count fraction used in the related Series of certificates.
For example, industry convention is that fixed rate securities bear
interest on a 30/360 day count fraction while floating rate
securities often bear interest on an actual/360 day count fraction.
Accordingly, any floating payments made by a swap counterparty to
the Trust which relate to a floating rate Series of certificates
with an actual/360 day count fraction would also have an actual/360
day count fraction and any fixed payments made by a swap
counterparty to a Trust which relate to a fixed rate Series of
certificates with a 30/360 day count fraction would also have a 30/
360 day count fraction.
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(B) the Class A Notional Amount; and
(C) The Class A Certificate Rate.
The Class A Certificate Rate for each interest period is a per
annum rate equal to the arithmetic mean of London interbank offered
quotations for United States dollar deposits (i.e. LIBOR) for the
applicable three month period, plus .105 percent.\37\
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\37\ It should be noted that a substantial portion of the
Receivables in the Trust bear interest at the prime rate plus a
margin, while the investor certificates will bear interest at one or
more fixed or floating rates specified in the related prospectus. If
there is a decline in the prime rate, the amount of Finance Charge
Receivables in the Trust may be reduced and, even if there is a
similar reduction in any floating rate or other rates applicable to
the investor certificates, there will not be a similar reduction in
the other amounts (e.g. servicing fees or expenses for operating the
Trust) required to be funded out of such Receivables. The subject
Series prospectus notes that this mismatch between the various
cashflows into and out of the Trust results in ``basis risk'' which
is partially mitigated by the presence of the Interest Rate Swaps.
Thus, as noted in more detail above, payment of the Class A
Certificate Rate and the credit rating for such certificates may be
dependent, in part, on the swap agreements and the creditworthiness
of the swap counterparty.
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The principal on the Class A and Class B Certificates issued on
August 29, 1996, is scheduled to be paid on the September 2003 payment
date, but principal and interest for such certificates may be paid
earlier under the circumstances described herein (e.g. an economic
early amortization event). Principal payments will not be made to Class
B Certificateholders until the final principal payment has been made
for the Class A Certificates. Unless an early amortization event has
occurred, the Revolving Period will end and the Accumulation Period
(i.e. for principal payments to certificateholders) will commence at
the close of business on the fourth-to-last business day of August
2002. However, Citibank, as Servicer, may shorten the length of the
Accumulation Period and extend by an equivalent period the length of
the Revolving Period based on the amount of principal available to the
investor certificates of all Series determined based on the principal
payment rate on the Receivables and the amount of principal
distributable to certificateholders of all outstanding Series.
The Series prospectus for these certificates indicates that the CCA
was funded by an initial deposit of $55,860,000, of which $39,900,000
was for the benefit of both the Class A and Class B Certificates, and
$15,960,000 was for the exclusive benefit of the Class B Certificates.
In the event of an economic early amortization event, the available
shared enhancement amount (after giving affect to other withdrawals
from the CCA on the distribution date) will be applied to pay principal
of the Class A Certificates and the remainder of the available CCA will
be applied to pay principal of the Class B Certificates.
The Series prospectus states that it was a condition to the
issuance of the Class A Certificates on August 29, 1996, that they be
rated in the highest rating category by at least one Rating Agency.
Under this proposed exemption, employee benefit plan investors are able
[[Page 4065]]
to acquire only the Class A Certificates. The rating of the Class A
Certificates was based primarily on the value of the Receivables (see
Rating Agency Analysis in Paragraph 17 below), the extent of the
initial shared enhancement amount (i.e. the CCA, etc.), the
circumstances in which funds may be withdrawn from the CCA for the
benefit of the investor certificateholders, the terms of the Class B
Certificates and the Interest Rate Swaps and the credit ratings of the
swap counterparties [e.g., Citibank (South Dakota) and Citibank
(Nevada)]. In the event the short-term debt rating of either swap
counterparty is withdrawn or reduced below A-1+ by Standard & Poor's
Ratings Group or its long-term debt rating is withdrawn or reduced
below Aa3 by Moody's Investors Service, the Servicer will (as agent for
the Trustee),\38\ within 30 days after such rating withdrawal or
reduction, use reasonable efforts to (i) obtain a replacement interest
rate swap agreement with terms substantially the same as the respective
Interest Rate Swap, or (ii) establish any other arrangement
satisfactory to the applicable Rating Agency, such that the ratings of
the investor certificates by the applicable Rating Agency will not be
withdrawn or reduced. In the event no such replacement interest rate
swap agreement is obtained, or no other arrangement satisfactory to the
Rating Agency is established within such period, an early amortization
event will occur. The Series prospectus states that there can be no
assurance that the ratings of the investor certificates will remain for
any given period of time or that such ratings will not be lowered or
withdrawn entirely by the Rating Agency if in its judgment
circumstances in the future so warrant.\39\
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\38\ In this regard, the Department notes that the Trustee would
be obligated, as a fiduciary for ``plan assets'' held by the Trust,
to ensure that the Servicer uses reasonable efforts to take whatever
actions are necessary to satisfy the Rating Agency so as to avoid a
reduction or withdrawal of the current rating for certificates of a
particular Series following any reduction or withdrawal of the swap
counterparty's rating.
\39\ The Department cautions plan fiduciaries to fully
understand the risks and benefits associated with investments made
in asset-backed securities, such as credit card receivable ABS, or
any other fixed-income security. In this regard, section 404(a) of
the Act requires, among other things, that a plan fiduciary act
prudently when making investment decisions on behalf of a plan. The
Department also cautions plan fiduciaries that if the assets of a
trust which issues certificates is deemed to be ``plan assets''
under the Department's regulations (see 29 CFR 2510.3-101), the
plan's assets would include not only the certificates purchased but
also an undivided interest in each of the underlying assets of the
trust, including any interest rate swap agreement between the trust
and a bank. For a current statement of the Department's views on the
use of ``derivatives'' by pension plans, see DOL Letter from Olena
Berg, Assistant Secretary for Pension and Welfare Benefits, to The
Honorable Eugene A. Ludwig, Comptroller of the Currency, dated March
21, 1996.
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The Series prospectus states that delivery of these investor
certificates was made in book-entry form through the facilities of the
Depository Trust Company (DTC), Cedel Bank and the Euroclear System on
August 29, 1996. The underwriters for the Class A Certificates were
Citibank, Goldman, Sachs & Co., Merrill Lynch & Co. and Salomon
Brothers Inc. An application was made by Citibank to list the
certificates on the Luxembourg Stock Exchange. The Trust had previously
issued thirty (30) other Series of investor certificates which evidence
undivided interests in the Trust which were still outstanding at that
time.\40\ The Series prospectus states that additional Series are
expected to be issued from time to time by the Trust and that
additional credit enhancement will be provided for each additional
Series issued.
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\40\ The Series prospectus states that the aggregate amount of
Receivables in the Accounts included in the Trust as of July 7, 1996
was $31,796,288,366, of which $31,414,439,867 were Principal
Receivables and $381,848,499 were Finance Charge Receivables.
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Citibank represents that the credit rating provided to a particular
Series or class of certificates by the relevant Rating Agency may or
may not be dependent upon the existence of a swap agreement. Thus, in
some instances, the terms and conditions of a swap agreement entered
into by the Trust will not effect the credit rating of the Series or
class of certificates to which the swap relates (i.e. a ``Non-Ratings
Dependent'' Swap). Citibank states that typically when a swap agreement
is entered into by the Trust, the credit rating established by the
Rating Agency for the particular Series of certificates to which the
swap relates will be dependent upon the existence of the swap (i.e. a
``Ratings Dependent'' Swap).
Citibank represents further that each particular swap transaction
entered into by the Trust will be an ``Eligible Swap'' (as defined in
Section III.HH. above). In addition, each swap transaction will be with
an ``Eligible Swap Counterparty'', which shall be a bank or other
financial institution with a rating at the date of issuance of the
certificates by the trust which is in one of the three highest long-
term credit rating categories, and/or one of the two highest short-term
credit rating categories, utilized by the Rating Agencies rating the
certificates. However, if a swap counterparty is relying on its short-
term rating to establish its eligibility, such counterparty must either
have a long-term rating in one of the three highest long-term rating
categories or not have a long-term rating from the applicable Rating
Agency. If the rating of a particular Series or class of certificates
is dependent upon the terms and conditions of an Eligible Swap entered
into by the Trust (i.e., a ``Ratings Dependent'' Swap), the swap
counterparty will be subject to certain collateralization or other
arrangements satisfactory to the Rating Agencies in the event of a
rating downgrade of the swap counterparty below a level specified by
the Rating Agency, which would be no lower than the level that would
make such counterparty ``eligible'' under this proposed exemption (see
Section III.II above). If these arrangements are not established within
a specified period, as described in the Pooling Agreement, there will
be an early amortization event causing certificateholders to receive an
earlier than expected payout of principal on their certificates for the
series to which the swap relates. However, with respect to a Non-
Ratings Dependent Swap, the Pooling Agreement will not specify that
there be an early amortization event for the series to which the swap
relates if the credit rating of the swap counterparty falls below the
level required for it to be considered an Eligible Swap Counterparty
(as described in Section III.II. above). In such instances, in order to
protect the interests of the trust as a swap counterparty, the servicer
(as agent for the trustee of the trust) will be required to either:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement will
terminate);
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms.
Under any termination of a swap, the trust will not be required to
make any termination payments to the swap counterparty (other than a
currently scheduled payment under the swap agreement) except from
``excess finance charge collections'' or other amounts that would
otherwise be payable to the servicer or the seller (i.e. Citibank). In
this regard, ``excess finance charge collections'' will be, as of any
day funds are distributed from the trust, the amounts by which finance
charge collections allocated to certificates of a
[[Page 4066]]
series exceed the amounts necessary to pay certificate interest,
servicing fees and expenses, to satisfy cardholder defaults or charge-
offs, and to reinstate credit support.
With respect to Non-Ratings Dependent Swaps, each Rating Agency
rating the Certificates must confirm, as of the date of issuance of the
Certificates by the Trust, that entering into the swap transactions
with the Eligible Swap Counterparty will not affect the rating of the
Certificates, even if such counterparty is no longer an ``eligible''
counterparty and the swap is terminated.41
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\41\ Representatives from two of the Rating Agencies (RA Reps)
have indicated to the Department that certain series of certificates
issued by a trust holding credit card receivables will have
certificate ratings that are not dependent on the existence of a
swap transaction entered into by the trust. Therefore, a downgrade
in the swap counterparty's credit rating would not cause a downgrade
in the rating established by the Rating Agency for the certificates.
RA Reps state that in such instances there will be more credit
enhancements (e.g. ``excess spread'', letters of credit, cash
collateral accounts) for the series to protect the
certificateholders than there would be in a comparable series where
the trust enters into a so-called Ratings Dependent Swap. Non-
Ratings Dependent Swaps are generally used as a convenience to
enable the trust to pay certain fixed interest rates on a series of
certificates. However, the receipt of such fixed rates by the trust
from the counterparty is not a necessity for the trust to be able to
make its fixed rate payments to the certificateholders.
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Any Series of certificates which conveys rights with respect to an
Eligible Swap would only be sold to a Qualified Plan Investor (as
defined in Section III.JJ. above). Qualified Plan Investors will be
plan investors represented by an appropriate independent fiduciary that
is qualified to analyze and understand the terms and conditions of any
swap transaction used by the Trust and the effect such swap would have
upon the credit ratings of the certificates. For purposes of the
proposed exemption, such a qualified independent fiduciary would be
either: (i) A ``qualified professional asset manager'' (i.e. QPAM), as
defined under Part V(a) of PTE 84-14; (ii) an ``in-house asset
manager'' (i.e. INHAM), as defined under Part IV(a) of PTE 96-23; or
(iii) a plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such certificates.
Rating Agency Analysis
17. The Applicants state that the rating guidelines and stress
scenarios used by the Rating Agencies in assigning a rating to a credit
card receivable ABS take into consideration many factors and are
determined on a case-by-case basis. The Rating Agencies review three
principal areas in arriving at a credit enhancement level to support a
rating for a credit card receivable ABS:
(i) Quantitative performance of the portfolio, including historical
yield, loss, delinquency and monthly payment rates, as well as credit
exposure caused by factors such as geographic concentration of risk;
(ii) Qualitative portfolio factors, such as the originator's
underwriting standards, audit and control procedures, collection
process and marketing strategy; and
(iii) Legal and structural issues raised by the securitization
structure, such as priority of security interests, timeliness of cash
flow and exposures to third party bankruptcy risk (e.g. seller,
guarantor, obligor, servicer), etc.
The Applicants represent that each Rating Agency adopts a slightly
different approach to the determination of credit enhancement levels.
For example, Moody's Investors Service, Inc. (Moody's) generally uses a
Monte Carlo simulation model utilizing various possible cases with
subjectively assigned probabilities. This model then enables Moody's to
arrive at an estimate of potential lifetime losses which must be
covered by the credit support for the securitization. Standard and
Poor's Ratings Group (S&P) looks at a ``worst case'' loss scenario
based on subjectively assigned multiples of historical loss, portfolio
yield and payment rates to reflect a severe economic downturn over the
life of the securities. As with Moody's, this process produces an
estimate of potential lifetime losses which must be covered by the
credit support.
The Applicants state that because the credit card receivables in a
master trust are unsecured revolving debt obligations, the Rating
Agencies assume no recoveries on defaulted credit card accounts in
determining credit enhancement levels for each Series. Stress scenarios
are run reducing both the portfolio yield (total yield on the
receivables minus the sum of certificate interest, the servicing fee
and amounts necessary to satisfy cardholder defaults) and the monthly
payment rate, in order to test the level of defaults that credit
enhancement can withstand. Such stress tests assume no recoveries on
defaulted credit card accounts in the master trust. For example, for
``AAA'' rated certificates, available enhancement levels are structured
to enable a Series to withstand the worst case ``AAA'' scenarios, just
as would be the case with similarly rated transactions involving
collateralized assets such as mortgage loans or automobile loans or
leases. The first level of enhancement is typically ``excess spread''
(i.e. the amount by which the yield on the credit card receivables
exceeds amounts necessary to pay certificate interest and servicing
fees and to satisfy cardholder defaults). 42 Additional
forms of enhancement for a Series may include cash collateral accounts
(i.e. a CCA), reserve funds, letters of credit, the use of a senior-
subordinated structure or a combination thereof.
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\42\ For example, the annual portfolio yield for the Trust in
1995 was 18.11 percent. The annual certificate rates for each Series
outstanding at that time varied between approximately 5.50 and 8.8
percent, depending upon the date of issuance, the expected duration,
whether the particular Series certificates were Class A or Class B,
etc. The Series servicing rates (including interchange fees) varied
between 0.37 and 1.87 percent of the outstanding receivables. The
annual loss rate for the receivables in the Trust, as a percentage
of the average principal receivables outstanding was approximately
3.8 percent during this period. Under the Rating Agencies
hypothetical ``stress'' scenarios submitted by Citibank, the annual
loss rate could have been increased to approximately 27.5 percent
during this period without resulting in a failure of the Trust to
pay any interest or principal on the AAA rated certificates.
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Citibank represents that, in addition to the enhancement described
above, certificates have the benefit of one or more ``economic early
amortization event'' triggers relating to the receivables performance.
Breach of such a trigger will cause an early amortization event and an
early payout of principal to certificateholders, thereby protecting
certificateholders from any potential future deterioration of credit
quality of receivables in the master trust portfolio. Citibank states
that the combination of credit enhancement (sized to satisfy Rating
Agency ``high stress'' scenarios) and early amortization event triggers
assures that certificateholders will receive payment in full of
interest and principal.
Citibank represents that its credit cards are marketed nationally
and are held by millions of individuals. The consequent size and
diversity of Citibank's credit card accounts provide balanced risk
distribution. For example, as of June 25, 1997, the largest Citibank
master trust held in excess of $35 billion of receivables, generated by
more than 28 million accounts, and each individual cardholder had a
principal balance that averaged approximately $1221. Similarly,
Citibank states that its portfolios are geographically diverse with no
more than 15 percent of the receivables in Citibank's largest master
trust being concentrated in a single state and in only four states did
the percentage exceed 5 percent. Citibank notes that the loss
experience for a geographically well diversified portfolio
[[Page 4067]]
of a large number of relatively small obligations is more stable and
predictable than a portfolio of fewer, large individual obligations,
and/or high geographic concentrations. Citibank represents that because
of this diversification, a Citibank master trust should be able to
withstand a recession or similar economic downturn which might affect
different industries or geographic regions at different times.
Citibank states that a combination of credit enhancement, early
amortization triggers and portfolio characteristics are among the
reasons why no investor has failed to receive payment in full of all
principal and interest on the over $51 billion of Citibank credit card
receivable ABS issued from 1988 to the present. Citibank states further
that no Citibank credit card securitization has ever gone into early
amortization.43
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\43\ When the Department was advised by the Rating Agencies
concerning the ratings of certificates issued by trusts holding
credit card receivables, the RA Reps noted, among other things, that
different banks use different underwriting standards and may offer
cardholders different terms on their accounts. Some banks may be
willing to accept cardholders with riskier credit histories while
other banks may not or may offer better terms to cardholders with
superior payment histories. The result may be that some banks have a
higher quality portfolio of receivables than other banks. The RA
Reps stated that if a bank securitizes a portfolio of receivables
which holds a number of riskier accounts, the Rating Agencies will
require more credit enhancement measures because different
assumptions will have to be made about the performance of the
portfolio--e.g. higher charge-off rates will be assumed and greater
``excess spread'' will be necessary to avoid losses--in order to
achieve a Triple A rating. Thus, for example, Bank A's certificates
may receive a Triple A rating along with Citibank's certificates
even though Bank A may experience more charge-offs on the credit
card accounts and may have different payment rates on the
receivables associated with those accounts.
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Disclosures Available to Investing Plans
18. In connection with the original issuance of certificates, the
prospectus or private offering memorandum will be furnished to
investing plans. The prospectus or private offering memorandum will
contain information pertinent to a plan's decision to invest in the
certificates, such as:
(a) Information concerning the certificates, including payment
terms, certain tax consequences of owning and selling certificates, the
legal investment status and rating of the certificates, and any special
considerations with respect to the certificates;
(b) Information about the underlying Receivables, including the
types of Receivables, statistical information relating to the
Receivables, their payment terms, and the legal aspects of the
Receivables;
(c) Information about the servicing of the Receivables, including
the identity of the servicer and servicing compensation;
(d) Information about the sponsor of the Trust;
(e) A full description of the material terms of the Pooling
Agreement; and
(f) Information about the scope and nature of the secondary market,
if any, for such certificates.
Certificateholders will be provided with information concerning the
amount of principal and interest to be paid on certificates at least as
frequently as distributions are made to certificateholders.
Certificateholders will also be provided with periodic information
statements setting forth material information concerning the status of
the Trust.
In the case of a Trust that offers and sells certificates in a
registered public offering, the Trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934 (the '34 Act). Although some Trusts
that offer certificates in a public offering will file quarterly
reports on Form 10-Q and Annual Reports on Form 10-K, many Trusts
obtain, by application to the SEC, a complete exemption from the
requirement to file quarterly reports on Form 10-Q and a modification
of the disclosure requirements for annual reports on Form 10-K. If such
an exemption is obtained, these Trusts normally would continue to have
the obligation to file current reports on Form 8-K to report material
developments concerning the Trust and the certificates. While the SEC's
interpretation of the periodic reporting requirement is subject to
change, periodic reports concerning a Trust will be filed to the extent
required under the '34 Act.
The applicant states that at or about the time distributions are
made to certificateholders, a report will be delivered to the Trustee
as to the status of the Trust and its assets, including underlying
Receivables. Such report will typically contain information regarding
the Trust's assets, payments received or collected by the servicer, the
amount of delinquencies and defaults, the amount of any payments made
pursuant to any credit support, and the amount of compensation payable
to the servicer. Such report will also be delivered or made available
to the Rating Agencies or Agency that rated the Trust's certificates.
Such report will be available to investors and its availability will be
made known to potential investors. In addition, promptly after each
distribution date, certificateholders will receive a statement
summarizing information regarding the Trust and its assets, including
underlying Receivables.
Reasons for Plans To Enter Into the Exemption Transactions
19. Citibank states that a plan would choose to purchase the
investor certificates offered by a master trust to diversify its
portfolio and enhance investment return. During the past 10 years,
asset-backed securities (including Citibank credit card receivable
backed certificates) have developed into a very significant sector of
the U.S. capital markets. Citibank represents that in 1996, public
issuance of asset-backed securities (i.e. ABS) totaled approximately
$151.7 billion and almost equaled public issuance of corporate debt,
which totaled approximately $161.8 billion. Further, Citibank states
that the vast majority of public ABS issuances is AAA/Aaa-rated and, as
a result, public issuance of investment grade ABS was greater than the
public issuance of investment grade rated corporate debt, which totaled
$135.1 billion.
Thus, Citibank represents that for many fixed income investors who
have traditionally invested a significant portion of their portfolios
in corporate bonds, credit card receivable ABS have become a corporate
bond substitute. Citibank states that there are several primary
attributes of credit card receivable ABS that make them corporate bond
substitutes, including: (i) Very high credit quality (most are AAA/Aaa
rated); (ii) basic payment terms which can be structured to replicate
corporate bonds (e.g. bullet maturities or semiannual coupon payments);
(iii) healthy yield spreads in comparison to U.S. Treasuries; and (iv)
the issuance of large, liquid transactions that are characterized by
relatively narrow bid/offer spreads in the secondary market. Citibank
states that for these reasons, the investor base for credit card
receivable ABS has expanded in recent years and today includes the
entire range of institutional investors. Further, given the performance
to date of the ABS market, the Applicants expect that these
institutional investors will continue to increase the proportion of
their portfolio devoted to ABS. The Applicants note that on the supply
side of the market, given projections of continued growth in the credit
card business and the growing importance of securitization as a funding
source for the credit card industry, market participants predict
further growth in credit card ABS issuance in the near term.
As a result of these developments, the Applicants believe that
fixed income
[[Page 4068]]
investment managers seeking liquid, high credit quality fixed income
securities which provide a fair yield to U.S. Treasuries at relatively
low risk, are interested in or are already participating in the credit
card ABS market. The requested exemption would facilitate more
investment by plans in this market, and would enable the Applicants to
better structure offerings which plan asset managers would find
attractive.
Citibank credit card receivable ABS have been sold to employee
benefit plans covered by the Act (ERISA plans) without concern
regarding possible prohibited transactions involving the assets of the
master trusts, as ``publicly-offered'' securities described in the
Department's regulations defining ``plan assets'' (see 29 CFR 2510.3-
101(b)(2)). However, Citibank has requested the proposed exemption in
order to be able to sell such securities to ERISA plans without having
to sell to one hundred independent investors. Thus, if the proposed
exemption is granted, the Applicants would have the ability to sell
credit card receivable ABS which are designed to meet the investment
prerequisites of more limited groups of investors, including ERISA
plans.
20. In summary, the Applicants represent that the proposed
transactions will meet the statutory criteria of section 408(a) of the
Act because, among other things:
(a) The acquisition of investor certificates by a plan will be on
terms (including certificate price) that are at least as favorable to
the plan as such terms would be in an arm's-length transaction with an
unrelated party;
(b) The rights and interests evidenced by the investor certificates
will not be subordinated to the rights and interests evidenced by other
investor certificates of the trust;
(c) Any investor certificates acquired by a plan will have received
a rating at the time of such acquisition that is in one of two highest
generic rating categories from either of the Rating Agencies, and/or
the highest short-term generic rating category from any one of the
Rating Agencies;
(d) The particular class of certificates for each series to which
this proposed exemption will apply (an Exempt Class) will have credit
support provided to the Exempt Class through a senior-subordinated
series structure or other form of third party credit support which, at
a minimum, will represent five (5) percent of the outstanding principal
balance of certificates issued by the Exempt Class, so that an investor
in the Exempt Class will not bear the initial risk of loss;
(e) The trustee of the trust will not be an affiliate of any other
member of the Restricted Group;
(f) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates will represent not more than reasonable compensation for
underwriting or placing the certificates; the consideration received by
the sponsor as a consequence of the assignment of receivables (or
interests therein) to the trust will represent not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the servicer, that are allocable to
the series of certificates purchased by a plan, will represent not more
than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(g) Any plan investing in such certificates will be an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933;
(h) The Revolving Period for a Series of investor certificates, and
the conditions under which Citibank may designate additional Accounts
or remove previously-designated Accounts, will be described in the
prospectus or private placement memorandum provided to investing plans;
(i) The Trustee of the Trust will be a substantial financial
institution or trust company experienced in trust activities and would
be familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act;
(j) The Pooling Agreement will include an Economic Early
Amortization Event triggered by a decline in the performance of the
Receivables in the Trust;
(k) The Pooling Agreement will require Citibank to maintain a
seller interest of not less than the greater of (i) 2 percent of the
initial aggregate principal balance of investor certificates issued by
the trust, or (ii) 7 percent of the outstanding aggregate principal
balance of investor certificates issued by the trust;
(l) The Pooling Agreement will require that any change in the terms
of any cardholder agreements also will be made applicable to the
comparable segment of Accounts owned or serviced by Citibank which are
part of the same program or which have the same or substantially
similar characteristics;
(m) The addition of new Receivables or designation of new Accounts,
or removal of Receivables or previously-designated Accounts, will meet
the terms and conditions for such additions, designations, or removals
as described in the Pooling Agreement as well as the prospectus or
private placement memorandum for such certificates, which terms and
conditions will have been affirmatively approved by the Rating
Agencies, and will not result in the certificates receiving a lower
credit rating from the Rating Agencies than the then current rating for
the certificates;
(n) Any swap transaction relating to senior Certificates that are
covered by the proposed exemption must satisfy the several investor-
protective conditions applicable to Eligible Swaps and must be entered
into by the Trust with an Eligible Swap Counterparty; and
(o) Any Series of certificates which entails one or more swap
agreements entered into by the Trust will be sold only to Qualified
Plan Investors.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Massachusetts Mutual Life Insurance Company (MassMutual), Located in
Springfield, Massachusetts
[Application No. D-10436]
Proposed Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code,
shall not apply to (1) the proposed mergers of the following
Connecticut Mutual Life Insurance Company (CML) separate investment
accounts (SIAs), the assets of which include assets of employee benefit
plans (the Plans), into the following Massachusetts Mutual Life
Insurance Company (MassMutual) SIAs: CML Select into MassMutual SIA-A,
CML Fixed Income into MassMutual SIA-E, CML Basis into MassMutual SIA-
F, CML Money Market into MassMutual SIA-G, and CML Overseas into
MassMutual SIA-I (the Merger Transactions); (2) the proposed transfer
of Plan assets from CML Dimensions and CML Converts, after termination
of those SIAs, into MassMutual SIA-E and MassMutual SIA-A, respectively
(the Termination Transfers); and (3) the proposed transfer of Plan
assets from CML Life Style Funds designated as CML Asset Allocation A,
CML Asset Allocation B, and CML Asset Allocation C, after termination
of those funds, into MassMutual SIA-BC, MassMutual SIA-BP, and
MassMutual SIA-BA, respectively (the Life Style Transfers;
[[Page 4069]]
the Termination Transfers and the Life Style Transfers are referred to
collectively as the Transfer Transactions); provided the following
conditions are met:
(A) At least 30 days prior to the effective date of each Merger and
Transfer Transaction, MassMutual provides to a fiduciary of each Plan
participating in the CML SIAs (the Plan Fiduciary) affected by the
Transaction full written disclosure of information concerning the
proposed Transaction and the affected MassMutual SIAs, including a
current prospectus and a full and detailed written description of the
fees charged by the affected MassMutual SIA's and the funds in which
they invest, the differential between that fee level and the fee level
applicable to the affected CML SIAs and the reasons why MassMutual
believes that the investment is appropriate for the Plans. The notice
will also inform the Plan Fiduciary of the proposed effective date of
the Transaction;
(B) As part of the disclosure required under paragraph (A) of this
exemption, MassMutual notifies the Plan Fiduciary in writing that
instead of participating in the particular Merger or Transfer
Transaction proposed by MassMutual, the Plan Fiduciary may direct that
the assets of the Plan in the affected CML SIA may be transferred,
without penalty, charge or adjustment, to any other available
MassMutual SIA or liquidated, without penalty, charge or adjustment,
for a cash payment to the Plan equal to the fair market value of the
Plan's interest in the affected SIA in lieu of the Plan's participation
in the proposed transaction;
(C) Upon completion of the Merger Transactions, the fair market
value of the interests of each Plan participating in the MassMutual
SIAs immediately following such Merger Transactions equals the fair
market value of such Plan's interest in the affected CML SIAs
immediately before the transactions;
(D) Upon completion of the Transfer Transactions, the fair market
value of the interests of each Plan participating in the MassMutual
SIAs immediately following such Transfer Transactions equals the fair
market value of such Plan's interest in the affected CML SIAs
immediately before the transaction;
(E) The assets of each of the Plans are invested in the same or
similar investment type or asset class before and after the Merger and
Transfer Transactions;
(F) The assets of the CML SIAs will be valued for purposes of the
Merger and Transfer Transactions at the ``independent current market
price'' within the meaning of Rule 17a-7 of the Securities and Exchange
Commission under the Investment Company Act of 1940. The assets of the
CML SIAs being merged or transferred and the assets of the MassMutual
SIAs affected by the merger or transfer will be valued in a single
valuation using the same methodology by the same custodian at the close
of the same business day that the Merger and Transfer Transactions are
effected;
(G) No later than forty five (45) days after the Merger and
Transfer Transactions, each Plan Fiduciary will be provided a written
confirmation of the Transactions which will include a statement of the
number of units held by each Plan in each affected CML SIA, the unit
value of each such CML SIA unit and the aggregate dollar value of such
Plan's CML SIA units, determined immediately prior to the Transactions,
as well as the number of units held by each Plan in each affected
MassMutual SIA, the unit value of each such MassMutual SIA unit, and
the aggregate dollar value of such Plan's MassMutual SIA units,
determined immediately after the Transactions.
(H) Neither MassMutual nor any of its affiliates receives any fees
or commissions in connection with the Merger and Transfer Transactions;
(I) The Plans pay no sales commissions or fees in connection with
the Merger and Transfer Transactions;
(J) The Plans participating in the CML SIAs are not employee
benefit plans sponsored or maintained by MassMutual or CML; and
(K) All assets involved in the transactions are securities for
which market quotations are readily available, or cash.
Summary of Facts and Representations
1. The Plans involved in this proposed exemption are pension,
profit sharing and stock bonus plans which are exempt from Federal
income taxation under section 501(a) of the Code by reason of
qualifying under section 401(a) of the Code.
2. The proposed exemption is requested on behalf of the
Massachusetts Mutual Life Insurance Company (MassMutual), a mutual life
insurance company organized under Massachusetts law. Another
previously-unrelated mutual life insurance company, Connecticut Mutual
Life Insurance Company (CML), merged into MassMutual on February 29,
1996 (the Company Merger).
3. MassMutual represents that it performs a wide variety of
services for employee benefit plans, including opportunities for the
Plans to invest in group annuity contracts (the GACs), which are
popular funding vehicles for Plans. The funds invested in the GACs are
allocated by the Plans' fiduciaries or by individual participants among
separate investment accounts (SIAs) maintained by MassMutual for
investment in various types and classes of assets, including the
MassMutual Institutional Funds and other mutual fund companies
affiliated with Mass Mutual. For example, funds invested by a Plan in a
GAC might be allocated among several SIAs, which in turn invest in
various MassMutual mutual funds. MassMutual represents that prior to
the Company Merger MassMutual maintained twenty-five SIAs (the
MassMutual SIAs) and CML maintained twelve SIAs (the CML SIAs). The
assets of the MassMutual SIAs involved in this proposed exemption are
invested solely in mutual funds affiliated with MassMutual, whereas the
assets of the CML SIAs involved in this proposed exemption are invested
in various marketable equity and debt securities.
4. MassMutual represents that five of the CML SIAs have investment
objectives and strategies which are substantially similar to those of
five MassMutual SIAs, holding assets which are of the same or similar
class and type. Since the Company Merger, these five CML SIAs have been
maintained by MassMutual with the same investment advisors and
portfolio managers as the corresponding MassMutual SIAs. In order to
eliminate duplicative administrative expenses and take greater
advantage of economies of scale, and to avoid the adverse consequences
of declining asset pools in the CML SIAs, MassMutual proposes to merge
the five CML SIAs (the Merging CML SIAs) into the corresponding
MassMutual SIAs (the Merger Transactions).
5. In addition to the Merger Transactions, MassMutual also proposes
to effect transfer transactions with respect to (a) two other CML SIAs
(the Terminating CML SIAs) which MassMutual has determined to have
investment objectives and asset types which are not widely utilized by
Plans covered by the Act, and, consequently, will not maintain
sufficient assets to provide an appropriate investment portfolio, and
(b) three CML master funds, called Life Style Funds.
The Terminating CML SIAs: MassMutual states that upon the Company
Merger, it was determined that MassMutual GAC funds would not be
invested in the Terminating CML SIAs, and that CML GAC investors would
be allowed to convert their investments to GACs issued by MassMutual.
Since the Company Merger, the assets in the Terminating
[[Page 4070]]
CML SIAs have declined steadily due to Plan transfers and withdrawals.
As a result of these developments, MassMutual represents that it will
be increasingly difficult for the Terminating CML SIAs to maintain
well-diversified portfolios and risk and return profiles that are
appropriate for the remaining Plan investors in the Terminating CML
SIAs. Accordingly, MassMutual proposes to liquidate the Terminating CML
SIAs by liquidation of the securities held in the SIAs and transfer of
the proceeds into the two designated MassMutual SIAs to take greater
advantage of economies of scale and to avoid the adverse consequences
of declining asset pools. Thus, Plans previously invested in the
Terminating CML SIAs would own units in the corresponding transferee
MassMutual SIAs of an equal value to their units in the Terminating CML
SIAs immediately prior to the transfer.
The Life Style Funds: The Life Style Funds are master funds,
maintained by both CML and MassMutual, which distribute Plans'
investments in GACs among various SIAs. Each of these Life Style Funds
offers to Plan asset investors a particular approach to asset mix,
investment philosophy and overall management, and a Plan asset investor
is able to designate a Life Style Fund with an approach which is most
consistent and responsive to the particular needs of the individual
Plan. After designation of one of the Life Style Funds, those Plan
assets invested in the GACs of the insurance company are directed into
the designated Life Style Fund, where such monies are then directed to
the particular SIAs in which the selected Life Style Fund invests. The
CML Life Style Funds are designated as CML Asset Allocation A, CML
Asset Allocation B, and CML Asset Allocation C. The MassMutual Life
Style Funds are designated as MassMutual SIA-BC, MassMutual SIA-BP, and
MassMutual SIA-BA.
MassMutual proposes to transfer the assets from the CML Life Style
Funds into the three MassMutual Life Style Funds, as follows: The CML
Life Style Funds are invested in (a) different combinations of the
Merging CML SIAs, (b) the Terminating CML SIAs, and (c) two other CML
SIAs (the Unaffected CML SIAs) which will continue to be maintained by
MassMutual and will not be merged or terminated. Therefore, to the
extent the CML Life Style Funds include investments in Merging CML
SIAs, the Life Style Transfers will be accomplished in the same manner
as the merger of the Merging CML SIAs with the corresponding MassMutual
SIAs. However, any investments of the CML Life Style Funds which are
held in one of the Terminating CML SIAs or an Unaffected CML SIA will
be sold 44 and the proceeds from the sale will be
transferred to the corresponding MassMutual Life Style Fund.
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\44\ The Unaffected CML SIAs will continue to be maintained by
MassMutual on behalf of investors other than the Life Style Funds,
and only the Life Style Funds' investments in the Unaffected CML
SIAs will be liquidated for transfer to the MassMutual Life Style
Funds. MassMutual chooses not to transfer the CML Life Style Funds'
interests in the Unaffected CML SIAs to the MassMutual Life Style
Funds because the Unaffected CML SIAs do not have corresponding
counterpart MassMutual SIAs.
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MassMutual is unable to conclude that the transactions described
herein do not constitute prohibited transactions under the Act.
Accordingly, MassMutual is requesting an administrative exemption from
the prohibitions of sections 406(a) and 406(b)(1) and (b)(2) of the Act
for the Merger and Transfer Transactions.
6. No less than thirty days in advance of each Merger and Transfer
Transaction, MassMutual will provide to a fiduciary of each Plan
participating in the CML SIA affected by the Transaction (the Plan
Fiduciary) a written notice of the proposed Transaction (the Notice).
The Notice will consist of a full written disclosure of information
concerning the proposed Transaction, the affected MassMutual SIAs, and
the proposed effective date of the Transaction. The Notice will include
a current prospectus for each of the mutual funds in which the affected
MassMutual SIAs invest and will describe the fees charged by the
affected MassMutual SIAs and the funds in which they invest and the
differential between that fee level and the fee level applicable to the
affected CML SIAs. The proposed exemption requires that the Notice
advise the Plan Fiduciary that in lieu of participating in the proposed
Transaction, the Plan Fiduciary may direct that the assets of the Plan
in the affected CML SIA may instead be transferred to any other
available MassMutual SIA or liquidated for a cash payment to the
Plan.45 In addition, the Plan Fiduciary will be provided
with a written confirmation of the subject Transaction.
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\45\ MassMutual represents that such a transfer would be
accomplished first by accessing available cash reserves in the
affected CML SIA and then, to the extent cash reserves are depleted,
by liquidating assets in the affected CML SIA.
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7. In accordance with the procedures to be utilized by MassMutual
in effecting the Merger and Transfer Transactions, the fair market
value of the interests of the Plans participating in the MassMutual
SIAs immediately following the Transactions will equal the fair market
value of each participating Plan's interest in the affected CML SIAs
immediately before the Transactions. MassMutual represents that the
fair market value of the CML SIAs involved in the Transactions are
readily ascertainable by reference to external markets, and that each
underlying security involved in the subject transactions will be valued
only at the ``independent current market price'' within the meaning of
Rule 17a-7 of the Securities and Exchange Commission under the
Investment Company Act of 1940 (the 1940 Act). MassMutual represents
that Rule 17a-7 constitutes a set of standards for the determination of
the independently verifiable prices for securities in transactions
between registered investment companies and their
affiliates.46 The Merger and Transfer Transactions will be
effected without payment of commissions or sales charges by the Plans,
including fees payable in accordance with Rule 12b-1 under the 1940
Act.
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\46\ Rule 17a-7 under the 1940 Act provides a general exception
from Section 17(a) of the Act for certain securities transactions
between registered investment companies and certain of their
affiliates. As a general matter, Section 17(a) of the 1940 Act
prohibits any ``affiliated person'' of a registered investment
company from selling any security to the registered investment
company. Rule 17a-7 permits certain types of affiliate transactions
if, among other things, the transaction is effected at an
independently verifiable price, the ``current independent market
price'' within the meaning of Rule 17a-7. MassMutual states that
this standard of valuation is appropriate for the proposed exemption
for purposes of valuing the assets held in the affected CML SIAs,
which are not investments in registered investment companies, that
will be merged or transferred into the affected MassMutual SIAs,
which are solely invested in registered investment companies.
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8. In addition to notification of each Plan Fiduciary in advance of
the Merger and Transfer Transactions, as discussed above, MassMutual
will also provide to each Plan Fiduciary a written confirmation of the
Transactions after they have been completed. No later than forty five
days after the Merger and Transfer Transactions, each Plan Fiduciary
will be provided a written confirmation of the Transactions which will
include a statement of the number of units held by each Plan in each
affected CML SIA, the unit value of each such CML SIA unit and the
aggregate dollar value of such Plan's CML SIA units, determined
immediately prior to the Transactions, as well as the number of units
held by each Plan in each affected MassMutual SIA, the unit value of
each such MassMutual SIA unit, and the aggregate dollar value of such
Plan's MassMutual SIA units, determined immediately after the
Transactions.
[[Page 4071]]
9. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons:
(a) Upon completion of the Merger and Transfer Transactions, the
fair market value of the interests of each Plan participating in the
MassMutual SIAs immediately following the Transactions will equal the
fair market value of such Plan's interest in the affected CML SIA
immediately before the Transaction;
(b) The assets of each participating Plan will be invested in the
same or similar investment type or asset class before and after the
Merger and Transfer Transactions;
(c) The Plans will not pay, and MassMutual and its affiliates will
not receive, any fees or commissions in connection with the Merger and
Transfer Transactions; and
(d) A fiduciary on behalf of each Plan, who is independent of and
unrelated to MassMutual or any of its affiliates, will receive advance
written disclosure of the Merger and Transfer Transactions, including
notification that the assets of the Plan in the affected CML SIA may
instead be transferred, without penalty, charge or adjustment, to any
other available MassMutual SIA or liquidated, without penalty, charge
or adjustment, for a cash payment to the Plan equal to the fair market
value of the Plan's interest in the affected SIA in lieu of the Plan's
participation in the proposed transaction.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 21st day of January, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-1790 Filed 1-26-98; 8:45 am]
BILLING CODE 4510-29-P
